Dollars to get through the downturn

Posted on June 25, 2009
Written by Melanie Winters

Three government-backed loan programs give working capital to businesses in need

The credit crisis that began last September and has reverberated throughout the economy ever since has obviously made money hard to come by. And marine trade organizations from all sectors have been working to find financing options to help companies survive.

Those options include three government-backed programs designed to provide viable marine businesses with the working capital they desperately need. Two of the programs — Dealer Floor Plan loans and America’s Recovery Capital loans — were set up by the Small Business Administration. A third program — Rural Business and Industry Guaranteed Loans — is offered by the U.S. Department of Agriculture for businesses of all sizes in rural areas. Loans for all three programs are issued through approved banks and are guaranteed by the federal government.

“The name of the game for the marine industry at this point is we have got to get through this downturn,” says Cindy Squires, legislative counsel for the National Marine Manufacturers Association. “These are programs that might be helpful to do that. We’re all going to be helped if we can get the lending out again.”

Inventory  loans

The program that has generated the greatest interest — and the most questions — is the Dealer Floor Plan loans added to SBA’s 7(a) program. Beginning July 1, DFP loans will be available for a minimum of $500,000 and up to $2 million for titleable inventory, such as boats and boat trailers. They come with a 75 percent government guarantee for the lender.

“Those are pretty good loans for a bank to take,” says Phil Keeter, president of the Marine Retailers Association of America.

“The availability of floorplan loans through this SBA program will provide marine dealers with a potential source of financing urgently needed by many and stimulate orders to manufacturers who will build and ship new product,” says Thom Dammrich, president of the National Marine Manufacturers Association.

Marine businesses will have to work through one of 1,200 SBA-approved lenders, a listing of which can be found at www.sba.gov. “A dealer could coach their banker to participate and be an SBA-approved lender … or if they’re already SBA-approved, coax them into using it for the marine industry,” says Jim Coburn, president of the National Marine Bankers Association and president of Flagstar Bank. However, he adds, “It doesn’t mean the banks have to use these programs.”

Lenders will evaluate each application based on traditional lending standards. If the company is in a higher risk category, like the marine industry, there will be an additional layer of paperwork.

Many dealers say the SBA-approved lenders they have contacted are reluctant to take on this line of lending because of their lack of familiarity with managing floorplan programs. Coburn says the major associations are working with the SBA to conduct outreach and training for lenders, including mentors who can walk them through the marine floorplan process.

“We do want to encourage banks to get involved,” says Coburn. “Right now there is a really nice profit in marine retail loans, and there’s opportunity in floorplan as well. Banks will be able to make a loan and book that loan for a reasonable interest rate, and that loan is backed by the government.” Marine floorplan lending risk, he adds, can be mitigated by using best practices and prudent inventory management.

ARC loans

The America’s Recovery Capital program was set up to provide temporary relief to small businesses suffering financial hardship as a result of the slow economy. “They’re short-term, limited loans similar to a disaster loan,” says NMMA’s Squires. “This will help a lot of businesses that are hunkering down and just trying to get through this downturn.”

ARC loans are interest-free, deferred-payment loans of up to $35,000 available to established, viable small businesses that need short-term help to make principal and interest payments on existing qualifying debt, which includes mortgages, term and revolving lines of credit, capital leases, credit card obligations, and notes payable to vendors, suppliers and utilities. After a 12-month deferral period, borrowers pay back the loan principal over a period of five years.

“There are plenty of small dealers and small boat manufacturers and ancillary companies that can take advantage of this,” says Coburn.

“It’s not a lot of money,” says Keeter, but the good thing is it’s interest-free and payment can be deferred. “It’s just to get over this hump.”

For marine companies that don’t meet the small business standard, the U.S. Department of Agriculture has a program for businesses in rural areas (population less than 50,000). “There are a lot of boatbuilders located in rural areas,” says Squires.

Keeter says there also are a lot of dealerships located in small towns around inland lakes that could take advantage of this program. And, he adds, the loans can be used for almost anything.

Like the SBA programs, these loans are offered through private lenders and are guaranteed by the government. Businesses can borrow up to $25 million for land, buildings, permanent working capital and refinancing debt — but not floorplan financing.

“You’ve got to be a viable business,” Squires says. “This is not a grant program.”

TALF

There is one other government program that could indirectly help the marine industry by encouraging banks to begin lending more money. The Term Asset-Backed Securities Lending Facility is a consumer and business lending program recently launched by the Treasury Department and the New York Federal Reserve Board. Under TALF, the New York Fed will lend up to $200 billion in non-recourse funding to any eligible borrower with eligible collateral. The loans will be funded in part by monies allocated to the Troubled Asset Relief Fund.

The thought behind the TALF program is that a federal guarantee makes a security less risky and, thus, more attractive to investors. The more investors purchase securities, the more money is made available for additional lending.

“TALF is about trying to get at the liquidity of the market,” Squires says. “Banks package loans in a security and sell them on the market. That market ceased to operate because of the collapse of the system. With TALF, the government would be purchasing these packaged securities.

“It’s to try to fix the blockage in the [lending] artery,” she adds.

“It provides banks with funding to make additional loans,” says Coburn, the NMBA president.

Just how successful this program turns out remains to be seen, however. “I think [the banks] have taken money from TARP and TALF and bolstered their balance sheets, but they have not increased lending,” says Keeter.

Coburn acknowledges that marine lenders have not been using TALF to bundle retail or floorplan loans. “We like that it’s available, but it seemed like it was tough for the banks to get a grasp of it. They’ve not jumped into it,” he says.

This article originally appeared in the July 2009 issue.