Sels stepped into the position of European marine leader at GE Capital Commercial Distribution Finance in 2012 with the market still experiencing the repercussions of the 2008 crisis. He talks to IBI about the state of inventory finance in the boating industry.
Q. How does inventory finance work?
A The inventory finance model is based on a three-way relationship between the boatbuilder, the dealer and the lender. GE Capital finances a dealer’s inventory by paying the builder for a boat as soon as it leaves the production line to go to the dealer. As collateral, GE Capital acquires title to the boat and charges interest for the financing period. The dealer then pays GE Capital back for the boat either when it is sold, or on the “due in full” date at the end of the finance period.
The basis of the three-way relationship is the builders’ support for the financing, which includes covering the interest costs during the finance period − anywhere from 30 days up to the maximum financing period of 540 days.
Regular stock checks carried out at the dealer’s premises validate the presence of the collateral, and GE Capital has assignment rights to the receivable subject to local legislation.
Q. What costs are involved for the participants in the programme?
A Marine floorplan finance in Europe involves interest payments and curtailments. Interest covers the cost of the financing for the boat, while curtailments are reimbursements of the loan to match the depreciation of the product while it remains unsold in the showroom. As boats age dealers may not sell them for the full value and must compete with newer models, so we have to manage the value of that asset over time. Curtailments also provide visibility to the lender on the dealer’s cash flow. If the dealer is having difficulties paying the curtailment of say approximately two per cent, it’s an early warning sign. Interest charges obviously reduce the profit margins the longer the boat sits in the showroom, so that creates a strong incentive to sell a financed boat as soon as possible.
Our current bases interest rate depends on the profile and volumes of a particular distribution network. Consistent rates are set that work for the vast majority of a builder’s dealers. We invest time with regular floor checks of the inventory to ensure that the collateral is secure.
Q. What happens when a dealer starts to have problems with the payments?
A Flexibility is essential. If a boat is slow to sell then we look for ways to help the dealer manage his cash flow. It’s a matter of balancing asset management against cash flow. One solution can be to look across the whole dealer network to see if there is another location where that type of product is selling faster. As the finance programme is a three-way relationship any change is agreed by the boatbuilder, the dealer and the lender. The builder wants to avoid any failure in their distribution network or the brand to become undervalued so it’s in their interest to support the dealers in tough times too. Such collaboration between all three parties delivers the best solution.
Many young companies achieve amazing sales but have more difficulty managing their cash flow and lack the equity to fund the business. They need to meet the administrative requirements to provide regular accounts or meet reporting standards that give the necessary level of transparency into their business operations, especially their cash flow in order for the credit lines to remain available.
Q. In what other ways has CDF adapted to the recession?
A Our focus continues to be on globalisation and supporting our boatbuilder partners wherever they are. We have a full offering in the core Western European countries, and restricted programmes in the Middle East and Africa. We are currently with 20 vendors and about 300 dealers across Europe.
The industry took some big hits in 2010 and 2011 and we live and breathe the same environment as our customers. Our loan volumes have dropped along with the industry’s slowing sales, so operating as a sustainable, profitable business means maintaining sufficient scale.
We continue to support our long-standing vendor partners and their dealers and offer extended terms in specific cases but keep a close eye on any warning signs.
Q. What are your current expectations for the market?
A In my opinion new boat sales will be down in 2013. Germany looks to have been stable while the UK and Scandinavia have proven to be down, with France proving the most difficult. There has been a 60-70 per cent decline in the boating market over the course of the recession, so there are currently not enough new sales to sustain the average boat dealer. They need to multiply their income streams with used boat sales, maintenance, berthing, winter storage and so forth, introducing new income streams to make their business more sustainable and financially more solid.
We don’t expect a turnaround in 2014. After the challenges of the last few years dealers remain cautious about taking on a high number of new boats and some dealers lack the resources to restock. They should gradually be able to rebuild their equity base.
The good news is that we have been seeing genuine optimism at the autumn boat shows. The great weather at the end of summer helped boost sales late in the season and new models are already selling well.
When the market does turn up again, liquidity might be an issue for dealers. If demand spikes, the industry may struggle to finance those new orders. We often see dealers become a victim of a fast growing market, with the level of growth outpacing their financial strength.
Q. What are GE Capital’s plans for the marine sector?
A With local finance often being difficult to obtain, GE Capital remains fully committed to the marine market, having supported it for 25 years through Deutsche Financial Services and TransAmerica, which were acquired by GE Capital in the early 2000s.
Commercial Distribution Finance is now centralised under one bank in the UK, GE Capital Bank Ltd. What that means for our customers is that there will be just one contract instead of separate contracts for each country. The emphasis for the customer is on simplification.
Thanks to our experience in the industry, we are confident of our expertise in the marine sector and ability to support both builders and their dealers to efficiently get product into the marketplace.
We believe that building a better business is about more than money, it’s the insight and best practice that our team can bring to your business that can really make the difference.