Dealers Eligible for SBA Floor Plan Financing
The U.S. Small Business Administration (SBA) is now accepting applications for government-guaranteed loans to back inventory. The SBA announced in a May
press release the new pilot program that runs July 1, 2009, to September 30, 2010. It was published in the
Federal Register on July 6, 2009.
“The program seems to be very attractive and has the potential to assist many dealers in finding an alternative floor plan provider,” says Scott Gorden, principal-in-charge of dealerships with LarsonAllen.
Program overview
According to the SBA, this financing will be part of its title 7(a) loan guarantee program. Loans will be available for a minimum of $500,000 up to $2 million, with a maximum repayment term of five years. The SBA program is funded by the 2009 stimulus package and will be considered for an extension after the pilot ends.
The amount of the government guarantee will depend on the advanced amount and the asset type. The following table details this relationship:
Asset Type
|
80% Advance
|
90% Advance
|
100% Advance
|
| New cars |
75% guarantee |
75% guarantee |
67.5% guarantee |
| Other |
75% guarantee |
66.6% guarantee |
60% guarantee |
The benefits of this program will most likely assist franchised dealers by supplementing their existing floor plan lines. The program may prove to be a lifeline to independent dealers who do not carry as much inventory, but in some cases have more difficulty securing adequate inventory financing, because they do not have a franchise.
Who is eligible
According to Gorden, this lending presents a great opportunity for many size dealers. Those who qualify must have the following three-year averages:
- Revenues < $29 million
- Net assets < $8.5 million
- Net profit after tax < $3 million
If this program is like many others the SBA insures, it will apply to a lot of dealers and bridge the working capital shortfalls many are currently facing. Traditionally, SBA loans have only been available to borrowers who could not secure financing by other means. This will still hold true, but there is no rejection process to prove this. The lender only needs to document why the borrower would not qualify for a traditional floor plan loan.
Prepare now and apply early
Generally, there is a limit to the amount of money that will be lent in total for an SBA program, so don't be the last one to apply. The key to getting financed through the new program is to have your financial information in order as soon as possible. The SBA requirements include tax returns, dealership financial statements, personal financial statements, and a detailed business plan.
According to the SBA, borrowers will be subject to monthly bank compliance requirements, which may include the following submissions:
- Total disbursements and repayments at least quarterly
- Inventory reports and lender floor checks
- Borrower financial statements
- Inventory aging reports and a curtailment charge
Although this is a government insured loan, it will still be subject to all policies and procedures of the lending institution providing the financing. “You want to put yourself in a position that looks as credit worthy as possible before you contact your lender,” Gorden recommends.
Lender participation is essential
“The district directors are committed to getting maximum involvement from lending institutions, which they hope will help as many dealers as possible. This is good news for the automotive industry,” Gorden says.
Lender involvement will be key for this program to be successful, as the SBA’s only role is to insure the loans—without their involvement there will be no loans. In an audio seminar on July 8, 2009, presented by the National Auto Dealers Association (NADA), Grady Hedgespeth, director of the Office of Financial Assistance, said he is optimistic that there will be participation; however, the SBA will not be maintaining a list of participating lenders. He said this was due to the difficulty in aggregating that data, and because the program is temporary, they are not able to dedicate resources to it at this time.
It is expected that lender involvement will be low at first. The commercial lenders have to familiarize themselves with the program. Those who will qualify to participate in the program are generally those who already do floor plan lending, due to the expertise required to administer and service these loans efficiently and effectively. If lenders are inexperienced, they will face additional requirements to be able to lend the money.
Historically, the SBA has charged a 2 percent servicing fee. However, this fee will be waived, and as a result, it is our understanding that SBA guaranteed loans will not cost the customer any more than a traditional loan. This is important because lenders will be more likely to lend funds when they can get them insured through the government. The SBA will not require curtailment on the floor plan lines; however; most lenders will still charge it based on standard lending practices.
How we can help
Our dealership professionals can help you prepare or review the information that may be required to apply for these government-guaranteed loans. We can also answer your financial, accounting, and tax questions as you complete your application.
For more information, contact a LarsonAllen dealership specialist in your area.
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