There has been a great deal of publicity concerning fees that financial institutions have sought to impose as a result of new laws such as the Dodd Frank financial reform legislation. Sometimes, the fees have received massive publicity like the debit card fees from which Bank of America had to retreat. Unfortunately, many other fees have not received that kind of publicity, and the epidemic of new bank fees has not afflicted only consumers. In fact, dealers who are entering all sorts of financial arrangements with their banks and other lenders should be on the lookout for fees.
One area of special concern for dealers is in floorplan financing. Today’s low interest rates, combined with the paperwork and audit responsibilities, can make floorplan financing a low profit product for some financial institutions.
Some lenders are addressing this by seeking to increase their yield. A floorplan lender wants to know that a dealer will be tied to it for a substantial length of time to justify the costs associated with setting up and maintaining a floorplan line. To ensure this, some lenders are imposing “prepayment” fees to enhance the return if a dealer changes its floorplan lender.
Generally, prepayment fees are used in term loans when the borrower pays off the balance early. For example, a borrower who pays off a five-year loan after two years to refinance at a lower rate with someone else will cost the bank its expectation of earnings. Historically lenders have dealt with this by imposing prepayment fees.
But a prepayment fee on a floorplan line? After all, a floorplan line is strictly a demand line of credit. Theoretically, the lender can call the line at any time, and the dealer can pay off the line at any time. So prepayment may not be the right modifier to describe the fee.
Nevertheless, prepayment fees are showing up in floorplan line documentation. And they are not paltry charges. For example, one lender offers a diminishing fee based on the length of time the line is in place. There is a 2% fee for full payoff within the first two years, and that reduces each year thereafter until the end of the fifth year when the payoff fee goes away. The fee is not calculated just on the amount of the outstanding balance. It is calculated on the floorplan line amount. Consequently, a dealer who carries a $6 million floorplan line with $2 million outstanding, who shifts his business to a new floorplan lender after a year and a half, will face a prepayment fee of 2% or the line, or $120,000, which is actually 6% of the outstanding balance – a real disincentive to changing the floorplan source.
Dealers are well advised not to jump from floorplan lender to floorplan lender. During the recent financial meltdown, dealers found that their ability to maintain a floorplan line depended heavily on the strength of the relationship with the floorplan lender. However, when a dealer becomes unhappy with a floorplan provider or otherwise wishes to change its line, it should have the ability to do so without punishing fees. When negotiating a floorplan line, pay very careful attention to and negotiate the so-called “prepayment fee”. And that is a good idea in negotiating any financial arrangement.