The partnership between a dealer and a floorplan lender is “very relationship-based, and very emotional,” said Brian Fallon, senior vice president of commercial lending services at General Motors Financial Co. First-, second-, and even third-generation dealers could stay with a floorplan lender for 20 to 30 or more years,” he added.
“Obviously, we’ve had cycles in the business, good times and bad times, and typically the captive lenders stay with their dealer partners. So, [in turn] they stay with the lender that stayed with them through those times,” Fallon said. “With GM Financial now being the captive for GM, that’s become the draw for a GM dealer — to be more aligned with the OEM.”
Continuing to grow GMF’s floorplan penetration is one of the captive’s “most critical objectives” this year, Jonas Hollandsworth, GMF’s executive vice president of sales and credit operations, told Auto Finance News. To that end, GMF launched Dealer Dividends in November 2016; a program through which dealers have the opportunity to earn “dividends” by achieving benchmarks the company sets for them. In turn, dealers can put those dividends toward increased opportunity to earn on reserve, Hollandsworth said.
Dealer Dividends was available to existing GMF floorplan dealers during the program’s soft launch through December, and the captive opened it to non-floorplan dealers on Jan. 1. The program’s benchmarks are lower and the rewards are higher for a GMF floorplan dealer than they are for non-floorplan dealers because the value propositions are different, he said.
The captive also offers non-GMF floorplan dealers the opportunity to try out Dealer Dividends, through a test drive program, he added. The caveat: “We hold back roughly 50% of the earnings until they close their floorplan,” Hollandsworth said. “So they can utilize the program, and they can utilize their earnings within the program, up to 50%, while they are on test drive. Then, the balance of the earnings would be paid to them in cash, at the time of floorplan conversion.”
The captive saw about 86% of dealers that went through the trial period in November convert to GMF floorplan dealers. From December through March, about 40 dealers per month have engaged in the program, and in April, that number “escalated” beyond 40, according to Hollandsworth.
“I wouldn’t expect a 90% conversion rate on all of these months, but I am thinking somewhere from 60% to 65% of our test drive vintages — we would expect to see them convert to floorplan dealers,” he said. “So, we’re pretty optimistic about our growth in floorplan penetration this year.”
The ability to test a floorplan program before converting is “typically” something captives do, not banks, Derek Comestro, commercial market executive for Bank of America Dealer Financial Services, told AFN.
The bank doesn’t have a one-size-fits-all approach when it comes to floorplan and clients’ overall credit needs, he said. “Rather, we take the time to learn about the client’s business model — their needs, their opportunities — both from a short-term and a long-term perspective, and then we work to build a custom financial package that is targeted and solution-based.”
Bank of America recently “significantly” increased its number of relationship managers in an effort to “get more local” and deepen dealer relationships, Comestro said. “That’s what our relationship managers are really tasked with — going in and learning about the client,” he said. “Every dealer might be a little unique and a little different; therefore, we want to make sure we’re going in and tailoring our approach.”
The bank has also been focused on the process around paying off existing inventory and floorplanning new inventory this year, he added, specifically implementing bulk processing, as opposed to dealers having to manually punch in a VIN. “This has been particularly helpful and targeted at our large mega groups,” Comestro said. “We continue to work very closely with our internal product partners to help deliver our full capabilities to our clients, not just floorplan, but interest rate protection, real estate, acquisitions, financing, wealth management — you name it.”
Having the ability to offer a full suite of financing products, outside of auto, helps Bank of America diversify and differentiate itself to dealers, because it’s able to assist clients in multiple areas, he said. Comparatively, in floorplan, captives can’t really compete with the big banks when it comes to offering more competitive rates, Hylton Heard, senior analyst at Fitch Ratings, said. What they can compete on is their relationships with the OEMs, he added.
“That’s really their draw, and that can fluctuate up and down,” he told AFN. “You saw, during the crisis, a lot of the banks bow out of the market and the captives picked up a lot of share. So, it just varies here and there.” Floorplan lending is not only competitive, but lucrative, Heard said. “In today’s world, dealerships are super-profitable,” he said. “Last year was probably the record, in terms of revenue and profit, given what sales were. But this year is still probably going to be very good.”
In floorplan ABS portfolios, losses have been “virtually zero for all of the platforms that we rate,” Heard said. Typically, any dealer that has been in financial trouble, or went bankrupt in the past three to four years, did so either because of “very poor management or a life disruption like a divorce,” he added.
“The one thing you have to be careful of is an OEM pushing vehicles to dealers, which is something we’ve seen in the past,” Heard said. “That behavior has tuned down quite a bit, but it really depends on what the manufacturer does in the production plants. Do they adjust down, or do they force vehicles onto dealers and then ratchet up incentives — which doesn’t help used-vehicle values and profits either. So it’s a bit of a cat-and-mouse game.” Since the last recession, however, manufacturers “have really learned from the crisis and from overproduction,” he said.
As of May 1, the average inventory turn rate in the trusts that Fitch rates was 76 days, up from 73 in April, according to the rating agency. “When you look today at inventory levels, they are sitting in the low 70-day range, which is kind of elevated,” Heard said. “The captive or an OEM would like a 60-day supply, so it gets a little bit more expensive for dealers, because these vehicles are sitting on the lot for 15 days more than what they want. But, by no means is it a material concern for us.”
There are some brands, however, that currently have turn rates at 100 days, Heard said, which is “not a good thing,” because those vehicles sit on a lot and depreciate. He declined, however, to name specific brands. “They typically use incentives to then move those vehicles — so that’s not a good number,” he said. “If you see [averages] above 80, it’s something to keep your eye on for sure. If you see something in the 100s, then it’s a problem for sure.”
Floorplan space has been “ultra competitive” throughout the industry’s recent growth; particularly in the last three years, which is expected, Bank of America’s Comestro said. “Typically, you’re not going to see ourselves, or any lender, try to exit a relationship, unless there is a risk profile issue,” he said. “We’ve been a floorplan provider for 75 years. It’s a very important part of the business for us, and we’re very growth-oriented in it.”
GMF is a much newer player in floorplan — having launched in 2012 —– but is just as growth-oriented, Fallon said. “We’ve talked about, from a floorplan perspective, being in the 20% penetration range, and we are on target to do that, within the first five years,” he said. “2016 was our fifth year in business, and certainly by the end of this year we’ll be in that 20% range.”Like This Post