Textron Financial Corp.'s decision to pull out of floorplan financing has left many farm equipment dealers facing a shrinking number of options for backing their inventory.
Textron's chairman, president and CEO Lewis B. Campbell said in a statement that the move would "significantly enhance our long-term liquidity position in light of continuing disruption and instability in the capital markets."
This may be good news for Textron and other companies with similar strategies, but of no consolation to dealers without a floorplan lender for shortline equipment.
"This freezing of the capital markets is a classic response to the financial crisis we are experiencing on a global basis," says Michael Boehlje, Purdue Univ. agricultural economist.
"There is probably not a lender in the business that is exempt to the new finance market conditions that we are all facing," says Dennis Fedosa, CEO of Agricredit Acceptance, an agriculture financing company based in Johnston, Iowa.
Fedosa also offers an additional perspective. "We are also seeing less liquidity in the market because of non-traditional agricultural lenders. These lenders have been operating outside of their long-term core business and are now tightening back up to ensure they meet long-term objectives."
Dan Walker, the national accounts manager for GE Capital Solutions Commercial Distribution Finance (GE CDF), says the changes in the capital and credit markets are unprecedented, leading his firm to be more selective on new business.
"This will allow us to continue lending during the downturn, and then be in position to support our customers' growth once the downturn is over," he says.
Boehlje says those companies who continue to offer floorplan financing may be concerned about the credit-worthiness of dealers due to the economic slowdown some expect for the agriculture sector.
The University of Minnesota's Center for Farm Financial Management learned this in a recent nationwide survey: For now, most agricultural producers seem to be in relatively sound financial shape. More than 60% of survey respondents said that less than 10% of producers they deal with are experiencing financial stress now. Slightly more than 28% of respondents, however, expect at least 30% of their agricultural clients to experience financial stress during the next 3 years. The 2,300 respondents included lenders, educators, crop insurance agents, consultants, farm input suppliers and brokers.
The optimism dealers felt last fall, which was reported in Farm Equipment's 2009 Business & Outlook Trends report, had faded somewhat by early '09 as the full impact of the financial crisis was starting to show up in the ag industry.
This was evident when Farm Equipment re-surveyed equipment dealers in early January.
In the first survey, nearly 82% of dealers saw their prospects for new equipment sales in the coming year to be as good or better than they were in 2008. When they were re-surveyed in January, that number had dropped to slightly less than half. Nonetheless, this represented a healthy level of confidence considering the general state of the economy. Dealers are still expecting solid sales throughout the year.
Strategies for Floorplanning
Experts say there are ways dealerships can weather the capital crisis and support floorplan needs in 2009 and beyond.
Boehlje says that many dealers remember the ag sector's financial crisis in the early 1980s - and don't want a repeat. They may be among those willing to take steps now to shore up their financial stability. He says one short-term strategy is to move used equipment quickly - perhaps even at a loss - to help with cash flow and make their dealership more attractive to an alternative lender.
"It all depends on how much staying power you have," Boehlje says. He doesn't expect significant economic improvements for the 2009 or 2010 crop year.
This is where a clear understanding of your dealership's financial state and having long-term objectives can help you manage the crisis. A financial consultant can help dealers develop high quality financial information — and better define their dealership's long-term goals, says Fedosa.
"Qualification for inventory financed will require higher quality financial information. While audited statements are ideal, reviewed statements would be of benefit," he says. This means that an accountant or financial adviser should be brought into the discussion, even if it just means reviewing the statements that have been prepared by the dealership.
Jack Snow, president and CEO of Sheffield Financial, based in Clemmons, N.C., agrees, saying that such experts can help a dealer put forward the best financial picture.
"There may even be assets that you forget you have. It's good to have a reassessment from time to time," he says.
Segmentation is Key
Fedosa says it is also critical that dealers understand their market segments as part their long-term planning.
"Segmentation is key. Dealers need to focus on the impacts by industry, and within the ag sector, the segmentation by customer class and commodity in order to succeed. Lifestyle customers will be impacted differently from corporate producers, and the dairy industry will be faced with different challenges and have different needs than the grain producer," he says.
Tim Call, president of Empire Tractor in Waterloo, N.Y., agrees. His dealership serves such diverse segments as dairies, grain, vegetables, vineyards, even apple farms.
"We have to pick which segment we're going to concentrate on," Call says. He says the issue goes beyond just the floorplan financing and affects his parts inventory as well. He knows he needs to focus on equipment that will turn quickly.
Fedosa says dealers need to prove to their lenders that they can turn their inventory to match the market demand in their territories. Dealers need to manage inventory carefully, in terms of the type of assets they hold and the age of the equipment. GE's Walker offers similar advice.
"In the short term, dealers should be very mindful of maintaining a high level of financial performance and closely manage their inventory to match the current economic and sales environment," says Walker.
Some dealers are just tightening their inventory levels altogether - even operating on a cash basis for the time being. Kevin Heisterkamp, general manager for Missouri Valley Implement, in Missouri Valley, Iowa, says that extremely good 2008 sales - thanks to record commodity prices - are helping his cash purchases of shortline equipment this year. And, he may hold off on purchasing more expensive short-line equipment.
"You just have to be very careful if you're going on a cash basis," he says.
Jim Mayfield, president of Rainbow Agricultural Services of Ukiah, Calif., is also turning to some cash purchases. His dealership serves vineyards that require specialized, narrow equipment. He says some of his specialty manufacturers only do one production run each year.
"If you miss getting it in inventory, you miss the sale," he says. He is also reducing inventory and hoping to expand on his relationship with GE.
Where to Turn
Some dealers hope that institutions such as Farm Credit Services or local banks might step in. But, as one dealer says, there are 400 dealers in his state who are now turning to these same limited financing sources.
Richard Miller, segment manager, Tri-Green Equipment, Murfreesboro, Tenn., has been successful in finding local financing. In fact, he turned to local banks for better rates even before large floorplan financing companies started backing away.
"You need to be creative today in looking for financing," says Miller. He says the large financing companies' rates were tied to the prime interest rate, but had a floor rate - a rate that was higher than he found locally.
"Local small banks are still stable and want to do business locally," says Miller. "It's all about the credit worthiness of the dealer."
Local banks typically find dealerships to be too highly leveraged, says Boehlje. However, local banks also have a vested interest in a dealership's success.
"It merits investigation," he says. "Community banks should be concerned about the broader implications if the dealership goes out of business," he says.
Snow also believes local and larger, regional banks might be an option in terms of offering or expanding on lines of credit.
"There is money out there to lend," he says.
Some dealerships hope shortline manufacturers step in. Boehlje says the challenge is that shortliners need to find financing in the same shrinking capital markets. One possibility might be for shortline manufacturers to partner with the credit companies of large ag manufacturers, he says.
"It will be harder to get these kinds of deals done in this kind of business climate than a couple of years ago," Boehlje warns.
Fedosa advises finding a long-term financial partner that understands the ag sector.
"The days of shopping around for rates and multiple lenders is falling by the wayside," he says.
Walker says there is capital available for "credit qualified suppliers and dealers" in the agriculture industry - and it's priced appropriately for the current market cycle.
"We plan to remain active in the agriculture industry and help our customers manage through these unprecedented times," he says. Walker adds that GE CDF does not foresee a reduced number of floorplan financing options for the agriculture industry.
He echoes Fedosa's view in urging dealers to choose a financing partner committed to the ag sector.
"Dealers should seek established financing companies that are committed to the industry and actively deploying capital," Walker says.
For the short term, Mayfield and others are hopeful that reducing inventory and purchasing with cash will sustain them until more financing alternatives are available.
"A need gets filled. It's just a matter of when and where," Mayfield says.
Snow says his own company began in an economic downturn, when he was out of a job. Today, it finances over $3.5 billion in consumer and commercial revolving and installment retail loans.
"When large companies go away, that gives a lot of opportunities to entrepreneurs," he says.