Part II: The good, bad and ugly of the SBA floorplan program

On Tuesday, I touched on some of the good and bad in the recently announced SBA floorplan loan guarantee program. If you didn’t see it, please go back and read it, along with the reader comments, some of which I’ll refer to here.

I said on Tuesday: It’s the banks that will ultimately be the reason the SBA program floats or sinks. If they get on board it will succeed. And why wouldn’t they? After all, to a non-banker like me, it appears attractive to be able to loan money at a good spread and have the lion’s share of any risk secured by an SBA backstop. Why, then, does it appear banks are stiff-arming the program?

First, the banking industry, in general, is getting pounded by rising consumer loan delinquencies, mortgage defaults, commercial real estate losses, increased federal reserve requirements and more. And while much of the pain was self-inflicted, the bottom line is today’s bankers have swung away from “loans to anyone with a pulse” to “if there’s any risk, we don’t want it!”

Clearly, banks are now structuring their lending policies on worst-case scenarios. It’s easier to sit and do nothing, making money from myriad fees, than to take any risks.

That said, however, banks are still in business to make money. There are many smaller local banks that didn't plow headlong into the real estate markets and, therefore, have a very low ratio of non-performing loans. That means there are opportunities out there. And there are many industry people working to make floorplan lending even more attractive to these lenders through the SBA program. Equally important, the SBA also wants to improve the program and is responding favorably to the industry.

So what are the MRAA, NMMA, NMBA (National Marine Bankers Association) and others urging SBA to do to make the program more appealing for banks and dealers? Some highlights:

• Increase the maximum loan amount from $2 million to $4 million, an amount that reflects the need and definition of small business. Plus, some major banks have indicated they would only consider larger loan amounts.
• Conversely, reduce the $500,000 minimum loan amount, thus making the program applicable to businesses unable to obtain but still needing only a small floorplan for inventory.
• Increase the maximum advance rates to 90 percent. Currently, SBA is lumping boats with used cars that qualify for only advance rates of 80 percent with a 75 percent guarantee. New cars currently get a 90 percent advance rate with 75 percent SBA guarantee. This is patently unfair to marine products and favors one industry over another.
• Change the program to allow refinancing of existing or new inventory with an existing lender. The program now only permits refinance of existing inventory with a new lender. Including SBA guarantees for existing lenders who are dropping their floorplan programs could be incentive to stay in the business.
• Review Bill Thompson’s comments posted to Tuesday’s Part I for more good insight.

For dealers, a major problem is finding a lender that’s willing to work with SBA loans. The 7(a) SBA program is notorious for its time-consuming, lengthy application process. Then there are unnecessary barriers to entry for banks that aren’t already doing floorplans but would do such lending via the new SBA program. At the same time, there are also policies that don’t help keep existing floorplan lenders in the business, either.

Despite of all that, however, there is a definite upside potential for all credit providers in the new SBA program. To advance it, it’s notable that NMBA is executing a three-pronged effort:

1. working directly with SBA representatives to improve the program

2. promoting to lenders around the country that floorplanning and consumer credit for boats can produce desirable yields

3. providing banks with educational materials and assistance in starting up such lending, identifying participating banks and assisting with the process

Commenting on the floorplan dilemma, dealer Noel Osborne wrote on Tuesday: “Don’t expect the dealers, on their own, to solve this problem.” He’s right. It will take the collective efforts of manufacturers, suppliers, dealers and bankers. That collective effort is under way, and while it will take some time to hone, it will happen.

To illustrate that, Randy Wattenbarger reported good news on Tuesday: “We are several weeks into the SBA app process. The longest hang-up so far has been that our bank, which is already an approved SBA lender, had to additionally qualify as a SBA “floorplan approved” lender. Notified today that they have been so approved. Said to expect SBA approval in 3-6 weeks!”

Enjoy today’s I Discovered Boating video. Click here.