Capital One's commercial bank will halt its floorplan lending business for dealerships.
Challenging economic conditions contributed to this move, a bank spokesperson said. Floorplan lending operations will gradually wind down this year.
Capital One's dealer services business has more than 25 years of automotive industry experience. Its focus was on helping new franchised car dealers with floorplan needs ranging from $5 million to more than $100 million.
Floorplanning is the financing that helps dealers purchase the cars they put on their showroom floors and lots to sell to consumers. Dealers borrow from lenders such as banks and automakers' captive finance arms to secure this type of loan.
Floorplanning became a profit center for dealers in 2021 as borrowing rates fell and floorplan assistance from automakers offset interest costs as an incentive for stores to buy new vehicles. That assistance, in the form of payments sometimes referred to as credits, go to a dealership when it buys a vehicle at wholesale — before it's retailed to a consumer.
In 2010, the National Automobile Dealers Association said the average dealership made $2,355 in floorplanning. Five years later, that figure was $109,497. After a few years when floorplanning began costing dealerships again, the pandemic forced rates to be slashed. Floorplanning once again became a profit item. In 2020, dealerships made an average profit of $108,395. That was the final year NADA reported the data.
As interest rates rise and dealers have more inventory to finance for a longer period of time, floorplanning becomes more of a cost. That's what the industry expects to happen this year. As rates rose in 2018, floorplanning flipped with an average dealership cost of $55,164. The following year the cost rose to an average of $82,979.
Capital One commercial bank decided it would exit floorplan lending operations as it was a non-material component of its commercial banking business. Floorplan lending accounted for about 1 percent of the commercial bank's loan portfolio, a Capital One spokesperson told Automotive News, noting "it's not core to the long-term priorities of our commercial bank." The bank's exit from floorplan lending has no impact on Capital One's Auto Finance business, which deals with consumer auto loans, the spokesperson said.
While there are rumors among some in the automotive lending space that others might do the same as Capital One, none has announced any intention to do so. And Daniel Imbro, a managing director for financial services firm Stephens Inc., told Automotive News Capital One's move does not seem to be the first of many. "While Capital One is pulling out, we're not seeing other floorplan lenders pulling out, especially from franchise dealers. I don't think it presents a risk at least to my covered company universe as far as the franchise dealers because I don't think they see lenders pulling back."
Dealers can enforce traditional inventory control procedures to prepare for the economic and industry changes surrounding floorplanning. A focus on ordering the right vehicles for each dealership also is essential.
Rita Case, CEO of Rick Case Automotive Group, in Sunrise, Fla., told Automotive News in January she's taking her group to a "back to normal" cost structure. The past years of very low interest rates, low inventory and higher gross margins "is coming to an end." She expects inventory levels this year to be higher than in the previous 18 months though not as high as they were in 2019. She wants to ensure her store managers do things such as enforcing traditional inventory control procedures.
Greg Dougherty, partner at accounting firm Crowe in Tampa, Fla., recommends dealers put renewed scrutiny on their sales process and vehicle ordering to make sure the cars they're getting "make sense." Dealers didn't have to do as much to manage inventory in recent years, he said, so people have gotten out of practice.
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