The good, bad and ugly of the SBA floorplan program

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NOTE: This is Part I of a two-part look at the SBA loan program.

Exuberance echoed throughout the marine industry when the Small Business Administration announced it would begin using TARP funds to guarantee dealer floorplan loans under its 7(a) program. It was an overdue action, to be sure.

After all, SBA has already expanded the scope of TARP to save Chrysler and GM, and even some big insurers. So providing emergency assistance to small businesses like boat dealers using some bailout funds makes real sense.

But it seems the music has quickly died since the program was announced. To date, there have been no known applications for an SBA floorplan loan guarantee. So it appears what started as good has now turned bad — one might even say ugly. Or has it?

Certainly the “good” started with the White House finally acknowledging the nation’s small businesses are the key to economic recovery and employment. Representatives of the MRAA and NMMA have diligently worked to get boat floorplanning included in SBA’s small business initiative.

The pilot program began July 1. Since then, it’s good to report that SBA has shown a genuine openness to modifying and improving the program to make it work. SBA has solicited comments and input. MRAA, NMMA and others have responded by submitting extensive recommendations for program improvements and continuation.

All that “good” notwithstanding, some “bad” has also bubbled up in a variety of ways. First, misinformation about the program’s guidelines has created confusion and disappointment. Here are a few examples:

  • True or False: A dealer cannot qualify if he has a net worth over $3.5 million. False. The limit is net worth in excess of $8.5 million. These days, I would guess many dealers will be under that cap.
  • True or False: A dealer cannot qualify if he has over $3 million in gross income. False. The dealer cannot have average net earnings in excess of $3 million after taxes during the past two years. Again, many dealers won’t have a problem meeting that cap.
  • True or False: The SBA-backed floorplan loan can refinance existing inventory. False. It cannot. But it will back up a separate new line of credit so dealers can inventory new models.
  • True or False: Banks filing for the SBA loan must use the same lending criteria to determine risk as they have in the past. False. SBA does not require those standards be applied but encourages banks to rewrite loan criteria because the resulting loans will be SBA-backed.

So where are the misunderstandings coming from? Certainly not any one source. First, we are dealing with the government, right? Can you say, expect built-in confusion? Second, as an industry so hungry for help, we were clearly overexuberant when announcing success and, thus, created an image of a floorplanning quick-fix. Clearly, we have made huge progress toward possible SBA assistance, but realistically, we still have work to do.

Then, there are banking issues. For example, finding an SBA-approved lender can be a problem. We’re finding out many banks simply refuse to deal with SBA-guaranteed loans. So they blow off the inquiring dealer by saying strict loan standards must be met.

For example, the dealer must be current on existing floorplan interest, fees and curtailments with a present lender, or last year's financial statements must have shown a profit — both standards many dealers cannot meet. But are these and similar requirements reasonable or even necessary?

One thing is clear: It’s the banks that will ultimately be the reason the SBA guarantee program floats or doesn’t.

Part II of this Dealer Outlook assessment of the SBA floorplan program will be posted Thursday, with a deeper look at the banks and related issues.

Until then, enjoy today’s video from the NMMA’s “I Discovered Boating” contest. Click here.

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