Getting to “Yes”: Financial Keys to Securing a Commercial Loan
Dealerships often use a floor plan to finance their vehicle inventory, but you might need another commercial loan or line of credit for an assortment of reasons. For example, you might decide to expand your facilities, hire more employees, or buy service department equipment. Or maybe you want a cushion to fund occasional working capital shortfalls.
Before contacting your lender, it’s important to gather all relevant information to prove your business is creditworthy. By anticipating information requests, you can expedite the application process and improve your chances of approval.
GAAP, or U.S. Generally Accepted Accounting Principles, is a collection of specific accounting rules and principles that’s regularly updated by the Financial Accounting Standards Board. Lenders generally prefer GAAP financial statements over those prepared under special purpose frameworks, such as cash- or tax-basis financial statements, because GAAP financials tend to be more transparent and consistent from one business (or reporting period) to the next.
Dealerships that follow GAAP use accrual-basis reporting. That is, they record sales as they’re earned and expenses when they’re incurred. A dealership’s balance sheet also includes receivables, payables, prepaid assets and accrued expenses. These accounts generally are created only when a business uses accrual accounting.
Reports to manufacturers
Most dealership franchise agreements require submission of monthly financial statements to manufacturers based on a format the manufacturer provides. Sometimes these financial reports don’t jibe with the format of GAAP financial statements. For example, a manufacturer’s financial report might focus solely on income statement items or, conversely, contain extra information that’s not relevant to lenders.
When you apply for a loan, underwriters may ask for both GAAP financial statements and financial statements to your manufacturer. If they receive both types of reports, underwriters are likely to inquire about any discrepancies. For example, if your vehicle sales differ between the reports, it might suggest that your dealership is holding open the sales ledger on the last day of the reporting period to boost sales. This might lead to questions about your cutoff policies.
Other hot spots
Other items lenders typically consider during the application process include:
Inventory turnover. Sales volume and how long vehicles sit on the lot can be key indicators of a dealership’s overall health.
Customer satisfaction ratings. Satisfied customers are likely to return to your dealership to service vehicles and purchase vehicles in the future.
Accounts payable aging. Aged payables may indicate that you’re having trouble paying bills in a timely manner.
Liquidity metrics. Short-term assets generally should exceed short-term liabilities. Lenders may be leery if you don’t have surplus working capital to fund operating expenses.
Typically, a lender will visit your showroom before approving a loan application. He or she will evaluate operations from the perspective of a hypothetical customer. Are salespeople friendly and knowledgeable? Is the service area clean and organized? Is the showroom updated and easy to access from the street? A lender also may request a meeting with your manufacturer’s representative to confirm financial results and discuss how you intend to use the loan proceeds for future operations.
Ready, set, apply
Need help securing a commercial loan for your dealership? Your CPA can be a valuable resource during the application process.