DALLAS, Oct. 21, 2022 / Used Car News – In today’s market, with rising inflation and tight inventory, smart floorplan financing becomes critical for dealers who use this tool.
Used Car News will be putting the spotlight on a few floorplan companies in the coming weeks, starting with Kinetic Advantage, based in Carmel, Ind.
During last month’s National Auto Auction Association Convention & Expo here, we sat down last month with Marty McFarland, president and chief executive officer of Kinetic Advantage, to discuss his company and the topic of floor planning.
UCN: In the midst of this market and economy, what are some of the challenges and opportunities you’re seeing?
McFarland: The challenge, frankly, in this environment is there’s just not enough vehicles moving out there. If you dial back a year ago, it was, ‘Oh, there’s not enough inventory. The prices are too high.’ Well, it’s less about not having enough inventory now and more about cars aren’t moving off the dealers’ lots like they were. The consumer is stretched. On the new side, the average monthly payment is $700. The consumer just doesn’t have the income anymore.
My guess is a (used-car) consumer has got a 10-year-old car and they’re not trading into a 5-year-old car. That’s the challenge and the dealers are all facing it.
UCN: Outside of the lack of cars moving, what is another challenge?
McFarland: A challenge for a dealer is our challenge to solve. The underlying interest rates are going up, which is a challenge to dealers. Now you have to put a consumer in a used car that used to be $450 a month and now it’s $525 or $550.That’s a harder sell.
The lack of liquidity for consumers and the rising interest rates are a tough combination. Even though prices have adjusted on the used cars, they’ve only adjusted slightly. There hasn’t been a major shift yet and I hope it doesn’t happen. Our dealers have inventory that we’re financing and none of us want a radical shift.
It’s nice that it’s softening somewhat, because we’re going to need to so that consumer can come back into buying.
I see a prolonged challenging period, but there hasn’t been a crisis event. I don’t personally see one coming – but who ever does see it coming?
What’s going to happen is those dealers that are a little more thinly capitalized, a little more challenged and don’t typically move a lot of units across their lot, are going to be stretched from a cashflow standpoint.
UCN: What are typical problems dealers face when floorplanning and how do you try to help?
McFarland: Many dealers have multiple sources of floorplan right now. The challenge is these units start aging out – 90, 120 or even 150 days. The dealer has a curtailment payment (principal paydown on the loan) and they have to pay it off because the terms are up.
Where we try to be helpful for the dealer is when there’s a car on the lot that hasn’t been sold. A curtailment, or principal paydown may be $500 or $750 and the dealer still hasn’t sold that car. So, we offer things like ‘Curtailment Skip’ where, for a relatively small fee, you can skip that paydown and keep that cashflow on the lot. Everybody needs to make payroll, right? Then hopefully you can sell that car by the next period. Dealers really appreciate it.
I believe that since Kinetic Advantage is there for them in a challenging period, it’s a no-brainer who they’ll be with when times are good. They all will remember who is helping them out.
UCN: Do difficult economic times change the way you do business or how you attract new business?
McFarland: We’ve been very fortunate. We’ve been in business a little less than two years now. We really appreciate the reception we’ve gotten. We’ve literally brought on thousands of dealers. We continued to sign up dealers every month.
The challenge for these dealers is it’s tough out there. So, at times, our business becomes less sales oriented and more risk oriented. We want to help guide the dealers through this. But they have to work with us as well. It can’t be a one-way relationship.
So, if the dealer can cooperate when there’s an issue, we’re all about helping them out. This is our customer. We want them to stay in business.
UCN: Is there an area you have to focus on more in this economy?
McFarland: I think we’re probably more attentive to the audit process today, perhaps, than we were when cars were rolling off the lot in 40 days. When cars are rolling off the lot in 40 days, your audits are typically clean.
We’re on the lot, on average, give or take, 30 days. When vehicles start aging out and the dealer maybe starts to move it to a body or recon shop, it becomes a little more challenging to do an audit and know where the inventory is.
Just work with us. That’s all we’re asking the dealer to do.
UCN: What advice do you give to your dealers when they have a vehicle that they’re having trouble selling?
McFarland: I think it comes down to this: Don’t fall in love with that car. We all know that, but it’s hard in practice. Let’s pick a number. A dealer says, ‘I’ve got $10,000 invested in this car and I know there’s somebody out there I could retail this, too. I just need another 60 days.’
Well. are you really going to move it in 60 days? Your best money is probably going to be the money you get today on that car.
Particularly with the digital platforms, it’s so easy to move those cars right now. You don’t even have to move them off the lot to sell them.
It’s really just that discipline of sticking to the things that work in your business. Fresh cars are what works.
UCN: What else should the dealer know?
McFarland: We know every independent dealer needs multiple sources of capital for their business. Every dealer wants more than one source for floorplan funding. Having two or even three floorplan sources makes a ton of sense for dealers. It gives them options and flexibility.
If you sign up with Kinetic (sign up doesn’t cost a thing) and we don’t charge you for audits. But it gives you flexibility.
We look at the viability of a dealer’s operations. We make sure the dealer has cash moving through his bank account, both incoming and outgoing. We obviously put hands on hoods and make sure those vehicles are there and that they’re valued properly.
On the other side of the equation – the retail side – it’s important to have multiple sources of financing for consumers. In this environment, you’ll get certain lenders that pull back or change their terms. You have to maintain options for consumers.
We work with auto retail finance companies to bring those options to dealers (and their customers).
UCN: What happens when a floorplan relationship goes bad?
McFarland: That’s the part of the business nobody really likes. But typically, one of the reasons it goes bad is the vehicle has been sold to a consumer, the dealer receives the funding, but we haven’t been paid off.
What you don’t want is for that one vehicle to go to two and then to five – where the dealer digs a hole so deep that he/she can’t dig themselves out of it.
Some of this is just part of the business. But it’s all about how the dealer responds to that issue with you. So, if you set up a payment structure and he abides by it, we’ve got a dealer we can work with through the issue.
It all depends on the dealer.
But we can’t have dishonesty. If we see dishonesty, then we know we have a dealer we can’t trust.
UCN: What other trends are affecting the floorplan business?
McFarland: The shift to digital was profound. And it all accelerated during the pandemic. Not too many years ago, you met the dealer at the action and you want to sign them up by next week. Very different today.
The speed of floorplan industry has accelerated dramatically. No longer are we happy with signing a dealer up in a week. We want to get them as quick as tomorrow because dealers are buying every day – not just once a week.
The great thing about where Kinetic Advantage is – we were built in this environment. We’re not dragging legacy systems and legacy practices into it. It’s all we know.
We’re under 800-900 physical/digital auction rooftops We’re pretty much everywhere a dealer can use our funds to buy inventory.
Digital is just one element of our business. The one-on-one relationship is still very important in this industry. Our dealers want to see us, to talk to and get advice or counsel from us.
Digital may enhance the transaction piece, but the person-to-person is just as relevant in my mind as it every have been. That service (and word of mouth) makes a difference Treating dealers right brings us more dealers.