Auto Dealer Monthly Magazine is the daily operations publication serving the retail automotive industry. This automotive publication serves dealer principals, officers and general managers with the latest best practices.
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By Jason S. McCarter and John D. Shipman DE ALERSHIP OPER ATIONS KEEPING THE LIGHTS ON Experts discuss four common options for dealers facing limited cash fow. Tere i Tere is much to be said for limr iting the t g iting th entanglements — fnanci and i cial an operational — that come w lender or investor money. with le Bu realistically, most auto dealerBut, rea sh h l ships, like most other businesses, re e reach a point where outside cash is hl f l helpful, if not essential. In many cases, outside cash is used to smooth the rollercoaster of seasonal fuctuations. In other cases, it may be required to accomplish long-term objectives such as strategic growth or expansion. To that end, this article surveys the legal framework for four common types of dealership fnancing. 1. FLOORPLANNING A foorplan line of credit covers the inventory acquired by the dealer. It is usually paid of on the sale of the underlying units. Typically, it involves a security agreement, a promissory note, an individual guaranty and other loan documents in favor of the lender. Te lender is also granted a security interest and rights to repossess inventory and other collateral in case of default. Te lender will generally fle a fnancing statement with the state and give public notice of its interest in the collateral. Obviously, this type of credit has the advantage of being available as it is needed. It's tied to specifc inventory purchases, thus enabling some fexibility in avoiding unnecessary carrying costs. And because it is secured by hard and liquid assets, it will ofen involve lower interest rates than other types of credit. In many cases, it may provide an alternative for dealers who could not meet the more rigid lending requirements associated with traditional bank loans. 2. RECEIVABLES LENDER OR PURCHASER Tere are a number of lenders that will buy or otherwise fnance retail installment contracts written by a dealership at a discount to the face value of the underlying contracts and the expected cash fow. Tis option will ofen require a master loan agreement with formal assignment of particular contracts or pools of contracts; it can also be done on a retail sale-by-sale basis. Typically, the lender will have to take possession of the underlying installment contracts and have its lien placed on the vehicles' certifcates of title. Te lender may pay the dealer in one of two ways: a set amount up front or payments based on the lender's actual collections made on the dealer's installment contracts. Te dealer should pay special attention to broad collateral and other rights requested by the lender and to contractual allocation of responsibilities (between dealer and lender) with respect to the retail buyers and collections. 3. UNSECURED BUSINESS LOAN Tis option works just the way it sounds. An unsecured loan is a straight loan of or up to a specifed amount, with payment terms. Te lender has no recourse to specifc collateral, so the interest and fees charged by the lender may be higher than with other types of credit. Such loans are usually documented by a loan agreement and/or a promissory note and can be enforced by a breach of contract action. Lenders in certain states may also seek the right to confess judgment against the dealer unilaterally upon nonpayment. 4. EQUITY INVESTMENT Although less common than the "debt" fnancing options previously described, dealers sometimes seek "equity" from third-party investors. Equity fnancing comes in many forms. Jason McCarter, partner with Sutherland Asbill & Brennan LLP, is a commercial litigator and advisor representing automotive, utility, and education clients in a variety of complex business disputes and regulatory investigations. JMcCarter@AutoDealerMonthly.com J.D. Shipman, associate with Sutherland Asbill & Brennan LLP, represents automotive and other clients in mergers and acquisitions, corporate reorganizations, and general corporate and securities matters. JShipman@AutoDealerMonthly.com 36 AUTO DE ALE R MONTHLY • AUGUST 2013 A dealer may accept investments from friends and family or from outside parties such as investment funds, strategic investors and wealthy individuals. In each case, the dealer gives up some of its ownership in the business in exchange for the invested funds. Equity fnancing is more common in cases where dealers are looking to fund an expansion of the business; however, depending on the agreement between the dealer and the investors, the investment funds might be used for operational or other business purposes as well. Unlike traditional debt, neither the dealer nor its principals are typically responsible for "paying back" the investor if the business fails. Because equity investors are taking much more risk than a bank or a traditional lender, these investors typically demand a high upside, preferential distribution rights, and special governance rights in the business. In short, this type of fnancing almost always requires the dealer to give up some control over the business. Tere are nearly as many fnancing options available as there are cars on the road. Whatever the type, it is important to ask questions of the lender or investor and to understand the legal documents requested by them. Even the smallest details in a loan document or other contract can have a major impact on a dealer's operations and, in some cases, can limit the availability of other funding sources. In that regard, there is no substitute for good legal counsel.