Wholesale Financing for Community Banks: The Business Case, Deposits, Asset Verticals and Strategy

Community banks are uniquely positioned to support the specialized needs of the businesses in their local communities. However, without the scale of regional and national banking operations, it is challenging to truly deliver on all the needs of their local customers. Wholesale financing for dealers of manufactured goods, also known as floor plan financing, has typically been one such product offering that community banks have left to specialty financing companies, captive finance organizations of the manufacturers, or the large national banks.

In today’s market, banks of all sizes have recognized the need to differentiate themselves in order to remain competitive. To facilitate differentiation, there is now a general acceptance around partnering with fintechs in order to enable new products and services.

By partnering with Vero, a bank can not only develop a wholesale financing program, without investing in new systems or adding specialized headcount, but also, diversify their product offerings, while catering to a pivotal local business segment, thereby fostering economic growth.

So, what is wholesale financing?

Wholesale financing is a type of financial service offering that facilitates credit to manufacturers or dealers of goods. Dealers can use this capital to purchase bulk quantities of goods, with the intent of selling them onward to consumers. It creates an efficient financial supply chain, enabling dealers to manage their cash flow better and continue their operations without financial constraints. This, in turn, boosts local economies by ensuring the uninterrupted flow of goods and services.

Now, why should community banks be interested in this, especially in the face of uncertain economic conditions?

Dealers of manufactured goods have demonstrated notable resilience during economic cycles, often outperforming other verticals, such as commercial real estate. Their resilience can be attributed to the continuous consumer demand for manufactured goods, regardless of the economic environment. As such, banks providing wholesale financing to these dealers are likely to experience lower default rates and more stable returns, thereby contributing to the overall health and robustness of their loan portfolios.

Community banks are renowned for their personalized customer service and local market knowledge. As such, they are ideally positioned to offer tailored wholesale financing programs. These programs provide multiple benefits to both banks and their communities:

• Diversification: In an era of volatile financial markets, diversification is a cornerstone of risk management. Offering wholesale financing allows banks to diversify their loan portfolio, spreading risk across various sectors – in particular, away from concentrated positions in commercial real estate.
• Strengthening Local Economies: By providing dealers access to financing, community banks ensure a steady flow of goods within their communities, stimulating economic activity, and creating jobs. This also provides the opportunity to keep capital in the community, rather than flowing out to specialty finance companies or national banks.
• Building Strong Relationships: Wholesale financing offers an opportunity for banks to build and deepen relationships with local dealers, thereby strengthening their customer base.
• Competitive Advantage: Not all community banks offer wholesale financing. Therefore, those that do, distinguish themselves from their competitors, providing an additional service to attract and retain customers.

Of course, introducing such a program is not without its challenges. Community banks must consider the potential of various execution risks and the need for a comprehensive risk management operation. Additionally, they will need to ensure they have robust systems in place to manage the program effectively. Nonetheless, with careful planning and risk management, the benefits of wholesale financing programs can outweigh these challenges.

In a rapidly changing economic climate, community banks must adapt and evolve to meet their communities' needs. Wholesale financing offers a significant opportunity for these banks to support their local economy while growing their business. In the spirit of going far by going together, it's an opportunity worth exploring.

The Business Case for Wholesale Financing: Seizing Opportunities and Driving Growth

Wholesale financing, also referred to as floor plan financing, presents a robust business case for community banks looking to enhance their product offerings. This type of financing is not just a lucrative avenue for revenue generation, but it also presents a compelling opportunity for banks to diversify their loan portfolios, particularly away from concentrations in commercial real estate.

Complement Existing Business Lines

Wholesale financing can complement a bank's existing equipment financing or indirect consumer lending businesses by providing an additional revenue stream. Dealers require the means to purchase large inventories, creating a symbiotic relationship where both parties can benefit. As dealers sell their inventory, payments made to the bank help reduce the outstanding floor plan loan balance.

Attract New Relationships

The introduction of a wholesale financing offering attracts new relationships with dealers of manufactured goods. This isn't limited to the lending alone, it includes additional opportunities like deposit accounts, and new opportunities for equipment or indirect consumer financing. Furthermore, it extends to financial dealings with the dealer principals themselves, presenting an opportunity for banks to offer a suite of consumer banking services.

Earn Incremental Yield

Compared to traditional commercial and industrial (C&I) lending, wholesale financing can earn banks an incremental yield. Given the short-term nature of these loans and the interest rates associated, banks can expect higher returns from wholesale financing compared to other C&I lending types.

Diversify Commercial Loan Portfolio

Wholesale financing offers an opportunity for banks to diversify their commercial loan portfolio, thereby reducing their risk exposure. With a diversified loan portfolio, the impact of a downturn in any particular sector is mitigated, creating a more balanced and resilient portfolio.When considering the investment into a new product offering such as wholesale financing, it's crucial to undertake a thorough financial analysis to determine the potential return on investment (ROI). The ROI should consider:

• Initial Investment: The upfront costs of building or acquiring the necessary infrastructure, technology, and talent.
• Operational Costs: Ongoing expenses associated with managing the wholesale financing offering, including costs related to risk management, loan servicing, and staff training.
• Projected Revenue: Estimated income from interest and fees, taking into account the expected loan volume and pricing.
• Risk Adjustment: The potential for loan losses, regulatory penalties, and other risks associated with wholesale financing.

A high ROI would indicate that the expected income would sufficiently cover the costs and risks associated with the new product offering, thus making the investment worthwhile.

In conclusion, the business case for introducing wholesale financing is compelling. It provides an avenue for community banks to diversify their portfolios, attract new relationships, and earn incremental yield. However, the decision should be underpinned by a careful and comprehensive financial analysis to ensure that the benefits outweigh the associated costs and risks.

Attracting Deposits in a Competitive Market: Unlocking the Power of Wholesale Financing

The landscape of community banking today is marked by a fierce competition for deposits, a phenomenon driven by several interrelated factors. Chief among these is the current high interest rate environment and significant changes in liquidity over the past year and a half.

We are presently in a period of historically high interest rates, a contrast to the near-zero rates seen during the height of the pandemic. This has led to a tightening of the credit market, where the cost of borrowing is higher, and the competition for deposit funding has increased correspondingly.

The high-rate environment, coupled with heightened inflation, has depleted deposit balances. Banks that once had excess liquidity 18 months ago now find themselves in a drastically different scenario. As consumers and businesses have started to spend more in response to improved economic conditions and higher prices, banks have seen their deposit volumes shrink.

In response to this challenging market, banks have rolled out multiple tactics to attract new deposits. Some are offering higher interest rates on deposit accounts, betting on the attractive returns to pull in customers. Others are reducing service fees to make their services more appealing, while many are looking to differentiate themselves through unique services and offerings.

Within this context, the strategy of offering wholesale or floor plan financing stands out as a uniquely powerful opportunity for community banks to differentiate themselves and attract new deposit relationships. This commercial credit product, tailored to dealers of manufactured goods, represents a niche market that many traditional financial institutions overlook.

The value proposition of wholesale financing lies in its specialization and rarity among community banks. By offering such a product, a bank can carve a niche for itself as a preferred partner for dealers seeking this type of financing.

Furthermore, the unique nature of wholesale financing often motivates dealers to shift their entire banking relationship. Drawn by the allure of a bank that understands and caters to their unique needs, dealers may move their deposit accounts, commercial real estate opportunities, and even personal accounts to the community bank offering such a product.

In doing so, the bank can establish deep, long-lasting relationships with these customers, leading to consistent deposit growth and a broadened customer base.

In conclusion, the current high-interest-rate landscape and the need to replenish deposit volumes are driving community banks to seek innovative strategies. Wholesale financing emerges as a standout tool in this quest, enabling banks to differentiate themselves in the market and pave the way for enduring customer relationships and robust deposit growth.

Navigating Asset Verticals: A Nuanced Approach to Wholesale Financing

As community banks venture into the realm of wholesale financing, a crucial aspect to consider is the diversity of asset verticals within the sphere of manufactured goods. Each vertical - be it auto, marine, RV, powersports, manufactured homes, musical instruments, or agricultural equipment - presents a unique set of opportunities, challenges, and nuances.

Auto Industry

The auto industry typically witnesses a high volume of origination activities due to the large market demand. However, many auto Original Equipment Manufacturers (OEMs) have captive financing programs, which can prove competitive. To succeed here, community banks may need to offer competitive terms, efficient services, and cultivate strong relationships with dealers.

Marine, Powersports, and Musical Instruments

Contrary to the auto industry, smaller asset verticals such as marine, powersports, and musical instruments often lack OEM-backed financing programs. This presents an opportunity for community banks to fill the gap, providing crucial financial services to these underserved segments. However, these industries might see lower ticket value and volume than some of the larger verticals.

Agricultural Equipment

On the other end of the spectrum, agricultural equipment financing deals with high-ticket items, due to the high cost of farming machinery. The volume of origination activities in this sector might be lower than in the auto industry, but each transaction can significantly impact a bank's portfolio. The bank's relationship with the dealer and end customer becomes paramount in this context. It's also essential to understand the seasonal nature of the agricultural business, which can lead to cyclical borrowing needs.

When sponsoring programs across these various asset verticals, it's crucial for community banks to tailor their approach to the unique characteristics and needs of each vertical. Factors to consider include:

1. Volume and Ticket Value: High-volume verticals like auto might require robust infrastructure to handle the sheer volume of transactions. In contrast, high-ticket verticals such as agricultural equipment might require a more personalized and relationship-driven approach.

2. Competition from OEM Financing Programs: In verticals where OEM financing is prevalent, banks may need to differentiate themselves through superior customer service, flexible terms, or other unique selling propositions.

3. Needs of the Dealers and Customers: Different asset verticals cater to different customer bases with unique needs and challenges. Banks need to understand these nuances to offer services that effectively meet these needs.

In conclusion, sponsoring wholesale financing programs across different asset verticals can provide community banks with an opportunity to diversify their portfolios, serve a broader range of customers, and deepen their relationships with dealers. However, success in this endeavor requires a nuanced understanding of each asset vertical and a tailored approach to serving each one's unique needs.

Community Banks and Floor Plan Financing: Local Expertise, Nimble Strategies, and Tech-Driven Differentiation

In the realm of wholesale or floor plan financing, community banks may seem like the proverbial small fish in a large pond dominated by captive finance organizations of the manufacturers and national banks. However, these smaller, local entities are far from disadvantaged; in fact, they possess unique strengths that allow them to provide a competitive and differentiated service.

Local Market Understanding

As local institutions, community banks have an inherent understanding of their markets. They are familiar with the local economic landscape, the nuances of regional industries, and the needs of local customers. This understanding enables them to make informed credit decisions and tailor their services to suit the specific needs of their local dealers, a level of customization that larger institutions often struggle to provide.

Nimble and Responsive Approach

Community banks, due to their smaller size, are often more agile and adaptable compared to their larger counterparts. They can quickly respond to changing market conditions, adjust their lending practices, and innovate their service delivery. This nimbleness enables them to maintain high levels of customer service and stay ahead of industry trends.

Adoption of New Technologies

With less legacy infrastructure to contend with, community banks are often better positioned to adopt new technologies that can enhance their service offerings. By leveraging cutting-edge technologies in partnership with Vero, these banks can offer a seamless, efficient, and modern banking experience, setting themselves apart from more traditional service providers.

The Opportunity: Focus on Small and Mid-Market Dealers

Captive finance organizations and national banks tend to concentrate their resources on the largest dealer groups, often leaving small to mid-market dealers underserved. These dealers, typically with 1 to 5 store locations, may not have the scale to attract the attention of large finance organizations. However, they represent a significant market opportunity for community banks. With their local focus, personalized service, and nimble approach, community banks can effectively cater to these underserved dealers, providing them with the financial services they need to thrive.

In conclusion, community banks hold a strong position in the floor plan financing market, thanks to their local expertise, agile approach, and ability to harness new technologies. By focusing on the underserved small and mid-market dealer segment, they can differentiate themselves from larger financial organizations and carve out a successful niche in the wholesale financing space.

Vero runs floor plan programs on VeroOS, its wholesale finance software, from application to payoff. New to the model? Start with what wholesale finance is.