What you need to know about floorplan financing.
I originally wrote this article for Powersportsbusiness.com
Most dealers in the powersports industry use floorplan financing. There are some dealers who are able to use floorplan financing for the free interest terms (if available) and then pay out product. The majority of dealers depend on floorplan financing in order to maintain an adequate level of inventory that allows them to offer and sell a variety of product to their customers. There is very little written about the relationship between a dealership and their floorplan lender. We accept that these lenders are a “necessary evil” in order to do business, but what happens when the relationship becomes strained and why did that happen?
Over several years of working within the powersports industry, I spent 16 years in the floorplan finance business. I started as a field auditor and worked my way up to a branch manager and regional senior account executive. My first week on the job had me involved in repossessing a motorcycle dealer. It was a surreal experience, pushing bikes down a snow covered street and watching creditors trying to grab what they could to satisfy debt. I learned a lot from that experience and may have been the start of me being a “clean up” manager as I was transferred to branches that had excessive weak accounts that needed work.
I have dozens of stories about the crazy situations I have been involved in dealing with troubled accounts and if you have a few hours and a bottle of Bacardi, I’d tell you all about them! Fact is, those situations helped me learn what worked, what didn’t and what desperate people will do in desperate times. I can also say that in most if not all of those experiences, the situations were a result of the actions of the business owner, not extenuating circumstances. I want you the reader, to know how not to get into that type of situation.
The concept of floorplan financing is quite simple. You order product from your OEM and they in turn get finance approval from the floorplan lender. Your OEM gets paid immediately for the product and it gets shipped to your dealership. When you sell it, you pay the floorplan lender. Pretty simple, right? It is until you don’t bother paying for sold product until a field auditor shows up or you don’t pay interest charges when they are due or your financial status gets weak. This is where problems begin.
Owning and managing a powersports dealership has its own unique challenges. I have managed a few dealerships and I can appreciate as well as understand those challenges. It’s a seasonal business with highs and lows in cash flow. Maintaining margins, while dealing with competition who have lower overhead or think volume is more important than margins, can always be a source of headaches. Still, there are some things you just can’t do: To neglect or jerk around your lender. Doing so is the beginning of the end for your retail business.
The people who work in the lending industry are good people and they have a job to do in protecting their investment, just like you do for your business. While they have multiple books on policy, their strategy and focus is fairly basic in their approach and that is, past history and numbers don’t lie. Essentially, business to them is all about numbers … turns, margins, percentages and trends. It should be for you as well. Your business sells fun but in order to keep doing that, you also have to pay attention to the numbers I mentioned above.
Past history to them means, is the inventory easily accessible? Is sold product paid for right away? Is the dealership clean and presentable and does the owner cooperate when floorchecks are performed? Numbers not lying means to them, do the turns fit into industry averages and do they justify the current credit line? Are margins strong enough to cover payables and fixed costs and still allow for profit? Certainly, there are other factors and variables that are looked at but this gives you an idea of their focus.
When the past history and those important numbers that don’t lie are not favorable, you become a problem or “watch” account. Business can become more expensive for you as a number of things can happen such as; higher interest rates; reduced credit line; increased floorchecks and quite possibly, increased liquid security.
You play a role in controlling your relationship with your lender. Pay for your sold inventory in a timely basis and make those numbers that don’t lie, a priority in managing your business. It will help you become proactive instead of reactive as well as save you money and stress.