Analysis of GE’s rate increasePosted on
Although GEs rate increase will likely hit small dealers particularly hard, the companys decision to increase its rates is a response to its own rising cost of funds, according to Don Parkhurst, past president of the National Marine Bankers Association.
Its not trying to run people out of the marine business, said Parkhurst, a senior vice president with SunTrust Bank. Theyve got to cover their own internal costs. The increases reflect what it costs them to raise money today.
However, Parkhurst added, the substantial increase in rates could hurt many dealers, particularly those with smaller operations.
These are going to be huge additional expenses for a dealership that is already straining to make its monthly payments, Parkhurst said. The dealers are going to take this real hard.
Here are some details of the new rates, which go into effect April 1:
- The new rate plan is based on a dealers average money loan balance and the age of the boat. The previous rates were based on average outstanding marine receivables per month, the percentage of business financed by GE, and the age of the boat.
- A dealer with $99,000 or less in average monthly loan balances will now pay 14.27 percent, over the base rate, on a boat that is 541 days or older. That is the highest possible rate in the new rate table.
- In the old chart, the highest possible rate was 7.17 percent, which would have been paid on a boat older than 540 days by a dealership with less than 50 percent of its business financed by GE and less than $2 million in receivables per month.
- The lowest possible rate in the new table is 7.2 percent, over base rate. Thats for a dealer with an average monthly loan balance of $1 million or more on a boat up to 360 days old.
- Under the old system, the lowest possible rate was 4.42 percent, which was for a dealer that did 75 percent or more of its business with GE, on a boat less than 540 days old and with $6 million or more in receivables per month.
The highest rate, Parkhurst noted, has almost doubled. Also, the lowest rate in the new chart is higher than the highest rate in the old chart.
Its a pretty big jump, a very big jump, he said.
GEs Commercial Distribution Finance business notified marine dealers in late February that it was increasing rates, saying the changes are necessary to provide the level of service and liquidity the industry requires, according to a letter from Bruce Van Wagoner, president of GE Capital Solutions’ Marine Group.
Over the last several months, several marine wholesale and retail financing sources have exited the industry, retail boat registration numbers have fallen off dramatically, and many marine manufacturers have idled and/or rationalized their production, Van Wagoner said in his letter.
Parkhurst said the increase is a reaction by GE to the internal cost of funds.
They were losing money on all this business, he said. If you look at the money they borrowed from Warren Buffet at 10 percent, they were losing money on everything they did in marine floorplanning. Theyve got to have a positive return, and theyve got to be able to pay their funding source back.