Priorities for a Strong Commercial Lending Program
Auto dealers have survived through up-and-down economic cycles, dealership acquisitions are on the rise again, the SAAR is in the 16.3 million-16.7 million range, and 2015 is projected to be slightly higher. All signs that point to the fact that the auto industry has made a strong comeback since the days of the great recession.
So now, more than ever, is the right time for lenders to strengthen dealer networks, and Jerry Bowen, executive vice president at Wells Fargo Dealer Services, has a few suggestions to keep in mind when creating a solid commercial lending program.
Step once is to pinpoint dealer needs and provide them with the capital and services to help them operate their business more efficiently.
Those needs, according to Bowen, include:
- Inventory/floorplan financing
- Real estate financing
- Acquisition financing
- Deposits
- Treasury management
- Merchant card services
- Interest rate management
- Wealth/investment/estate planning services
General terms for various types of loans also include:
Inventory/floor plan financing
- Usually up to 100% of MSO or Blue Book value
Real estate financing
- 60-100% LTV
- 15 to 25 year amortization
Acquisition/blue sky financing
- Varies, but 50% of transaction price is a good benchmark
- 3-7 years amortization
How do lenders protect themselves when extending those loans? Bowen has a few suggestions on that, as well:
Floorplan
- System of record to track inventory at the VIN level
- Collateral management system
- Field audits
- Proper working capital levels
- Consistent payoff/curtailment policy
Real estate
- Proper LTV, the dealer needs to have equity in the real estate
- Sustainable cash flow
- Positive market characteristics need to be present
- Protection against change in rates
Blue sky lending
- Remember you are lending against franchise/intrinsic value
- Borrower equity should be meaningful
- Adequate/sustainable cash flow
- What makes a good blue sky loan to support the acquisition?
Like in any industry though, there are always causes for concern, and current market conditions, like high gas prices, increasing scrutiny from regulatory agencies, and the dwindling interest among Millennials, warrant a watchful eye.
