The lending stream has not dried up and credit is still available, but it may take some new approaches to locate and obtain it.
Jan Kelly, president of Kelly Enterprises, shared that message with her audience at the 2009 Marine Dealer Conference & Expo in Orlando. Kelly’s presentation, one of the most well-attended and favorably received of the event, offered numerous strategies and suggestions based upon the premise of her message. As she most succinctly put it:
“It’s there, the money is there, the lenders are there. But you’re going to have to go out and get it. The good old days of lenders lining up outside your door are gone.”
The framework of the presentation was built on what Kelly describes as the Six Cs of Lending: Credit, Capacity, Collateral, Character, Conditions and Compliance. These are the same “Cs” Kelly wrote about in an “In Their Own Words” piece for this magazine last April. But here Kelly was able to get into more depth and offer a number of tips. Here they are for your use:
How do you best obtain it, both for your business and your customers? The credit rating is obviously vital in each instance. For retail flooring, Kelly said the credit rating is calculated for the business owner and the business. It’s how the flooring is paid, how the mortgage is paid, how taxes are paid. On flooring loans, lenders are going to go back a minimum of three years. FICO scores (a proprietary credit score developed by the Fair Isaac Company, Inc.) primarily focus on the last three years.
For retail customers, Kelly said the dealership’s business model is going to have to change to one where credit is sold first and the unit will then be sold based on what the customer can get funded.
“The F&I people and your sales managers have to learn to read those credit reports beyond the score,” Kelly said. “They’ve got to learn the codes, they’ve got to learn the dates, they’ve got to learn to do a proper credit interview … Listen for the flags. Learn about the sub-prime lenders. If they come in on a truck, ask them about the truck. How did they buy the truck? Did they finance it? Because with the lender approval and the down payment, it tells you what kind of boat you can sell them. It saves you time and grief and it saves them time and grief.”
Retail lenders use either an internal or external scoring system. The external credit score comes from these three credit reporting agencies: TransUnion, Equifax or Experian.
Fifty percent of Americans have had credit problems within the last three years, according to Kelly, and dealers should check with the credit bureaus before taking a loan to the bank. The reason for that is a bank needs to have a 40-percent look-to-book ratio (if you send the bank 10 deals, it wants to be able to fund at least four of them) in order to make money. Kelly said it costs banks, on average, $75 to check an application out, another $85 to track down missing information and $140 to fund it. Having a non-producing dealer on the books costs banks about $4,000 a year, so they don’t appreciate applications that waste their time and money.
“I recommend you call your banks and find out which bureaus they pull,” Kelly said. “They will pull a primary and a secondary and then, on top of that, you’ve got to find out which scorecard they use. Do they use mortgage, do they use auto, do they use auto enhanced, do they use FICO 08 … There are 18 different scorecards. We have to look at the same scorecard the lender is looking at.”
For the business, this means cash flow. Kelly said that although she knows many dealers who only prepare financial reports when it’s time to do their taxes, income statements must be done regularly.
“It has to be done monthly: the good, the bad, the ugly, because your banks want to see it monthly,” she said. “And they understand about the bobbing and the up and down and the ebbs and flows of it. They understand that you’re in a cyclical business; they want to see it anyway.”
Regarding the customer’s capacity, Kelly suggested that this is another area that be addressed during the credit interview to learn the person’s debt-to-income ratio, monthly obligations and discretionary income. One rule of thumb to use is that a customer looking for a loan greater than $60,000 needs to provide a personal financial statement.
Kelly told dealers to “Stock what you sell, not what’s on sale.” If a dealer stocks $2 million to $3 million in inventory, the bank is typically going to want to see that inventory turn three to four times per year. That turn number falls to around two for dealers with $10 million to $15 million in inventory.
“How many times a year does your inventory change – new and used?” Kelly asked. “Because you’re banker is going to want to know, not necessarily industry statistics, he wants to know from you and you’re going to have to track it.”
Kelly said it was also important that when dealers meet with lenders to talk about flooring they make sure to itemize for them all the business they are bringing to the table. “Do you have real estate loans, do you have merchant accounts, do you have checking, savings, money markets?” she said. “And don’t say, ‘Oh, they know my store because they drive right by it. They’re only a block-and-a-half down.’ They may drive by it and pay no attention because they’re focused on getting to work.”
This is self-explanatory. For the business owner, it’s the story of who you and your business are. What are you involved in? How long have you been in business? How long have you been at that location? Is it a family business? Do you own the land? Are you involved in the church activities, community activities? What impact do you have where you live?
“This is what I tell people on a retail basis, ‘it’s that when life gets so bad that you can’t stand it, people go home,’” Kelly said. “They may not like home, home may not like them, but they go home. For a banker, the banker needs to know where home is … You’re creating a story to sell the banks.”
Let your lenders know how things are going in your industry. They need to get to know you and learn about what you do and how you do it. Kelly recommends that dealerships host a “lender discovery day” where banks and credit unions are invited to the business or to a show so they can watch how the dealership works deals and meet all those involved.
Kelly said that when she was in the auto business she would meet with her bankers each week and the familiarity and trust that was built meant they would buy deals from her that they wouldn’t from anybody else.
For the lender to be in compliance with all of the rules and regulations, the dealership needs to be in compliance with them as well. Kelly told audience members they need to get their businesses in compliance with the Red Flags Rule, which is currently scheduled to take effect June 1. (To learn more about the Red Flags Rule, go to the government’s Web site – www.ftc.gov/redflagsrule – or to the Boating Industry site www.boatingindustry.com and do a site search for the term.)
“If you don’t have your Red Flag policies and procedures in writing, and education in place for your employees, you’re not going to get your contracts funded,” Kelly said. “So compliance is becoming large.”
Some other helpful tips from Kelly’s presentation:
Non-traditional lending sources are worth a look these days. Peer-to-peer lending organizations such as Prosper, Zopa, Lending Club and Virgin Money U.S. are all potential resources and may loan amounts up to $40,000.
“This year, when you’ve got somebody who can’t get approved on a retail basis, before you say ‘No’ and ‘Thanks for shopping,’ try peer-to-peer,” Kelly said. “You need to get cozy with somebody at each of these companies … These companies are acting as a loan-servicing firm. They get fees from the lender and they get fees from the lendee. If payments aren’t made in a timely fashion, then they start the repossession proceedings and they report to the credit bureau. Check into this, I think it’s here to stay for quite some time.”
Often when dealers talk to a lender about flooring, they are turned down because the lender does not have a mechanism in place or employees who know how to do flooring audits. Kelly recommended dealers contact a company called DataScan Technologies that provides those audit services.
Businesses must prospect for lenders and building personal relationships with the people in those companies is a vital part of that process. Kelly’s advice is to get to know all the banks, credit unions, thrifts and loans, no matter how small, within 100 miles of the business. Look them in the eye, shake their hands and know them on a first-name basis.
Prospecting is more important than ever because Kelly predicts the future of wholesale lending over the next two to three years is going to be with credit unions and smaller, regional banks – the kind that have three or four locations.
“If mainstream financing won’t work, think outside the box,” Kelly said. “Go elsewhere, because you can find it. You just need all these different resources.”