Keep Financing Simple

We originated the battery-powered, three-wheel scooter for the walking-impaired. We have established a network of 400 dealers across the country. To help them carry more inventory, we'd like to offer floor-plan financing (which the automobile industry uses) to 10 dealers, financing an inventory of about $8,000 each. That volume doesn't interest lenders. What are our options?

Newton Skillman

Finance Manager

Amigo Mobility International

Bridgeport, Mich.

In floor-plan financing, a manufacturer supplies a dealer with inventory and receives cash advanced against it from a third-party lender, either a financial-services company or a bank. The manufacturer pays a fee to the lender, and the dealer pays the lender for each item of inventory as it sells, plus interest. If inventory doesn't sell, the dealer returns it to the manufacturer and pays the lender the interest that accrued while the items remained on the floor. This allows a manufacturer to place more inventory with dealers who couldn't otherwise afford it, and to get paid up front. It leaves the manufacturer holding the bag for inventory that the dealer doesn't sell or sells but doesn't pay for.

Floor-plan financing works with large items that carry serial numbers, because the lenders must check periodically on what has sold and whether they have received payment. And it works with high-priced items that rack up big interest payments. Floor-plan financing is expensive. The cost floats with the prime rate and varies widely. A typical loan might run slightly less than receivables financing.

The deal you're seeking, with distributors spread around the country, must sound like administrative hell to lenders. And the interest they'll make on 10 deals of $8,000 each isn't worth the trip. If you could persuade a lender to finance one local dealer, that lender would probably expect recourse to you for any payments the dealer welshes on. That contingent liability could limit your access to other financing, says John Romney, a senior manager at Ernst & Young in Cleveland. At worst, it could wipe you out.

Ray Melcher, chief financial officer of Hi-Tech Connections, in Reading, Pa., and a former banker, suggests you could share a line of credit with your dealers. Keep it separate from other credit so the financing won't eat up all your working capital, and match your bank payments with the payment schedule you set up for dealers. Offer the bank first-lien rights on the financed inventory, which will exclude the equipment from any blanket lien another creditor might place on it. But that would limit other financing. And since you probably wouldn't audit your dealers, as an outside lender would, it would expose you to bad debt. Can your net margins survive all that?

Romney doubts you'll persuade a bank to finance the project separately. He suggests a more modest experiment: simply extend the credit terms for your best dealer by allowing, say, 90 days to pay instead of 60, and count it as a cost of marketing.

Invacare, a $260-million manufacturer of home health-care equipment, uses another low-cost alternative to floor planning. Dealers finance purchase of Invacare products over 9 or 12 months through their leasing company. Dealers have to pay on schedule, not, as in floor planning, when the product sells, and they end up owning whatever they can't sell. "It takes a lot of capital and a lot of guts," says Mike Parsons, vice-president of marketing. But Invacare set the system up when sales ran only $35 million, in 1982, so it's feasible -- and cheaper by far than floor-plan financing.

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Service With A Smile

I recently came to work for my family's 25-year-old trucking and warehousing business. I'm looking for some fresh management ideas to introduce here. I've read lots of books and listened to tapes, but everything's geared to manufacturing. Can you recommend books on managing a service business?

Robert Mack

Marketing Director

Sons Transportation

Worcester, Mass.

Len Schlesinger, a professor of management at Harvard Business School and a mentor to the owners of National Leisure Group ("Words from the Wise," June 1991, [Article link]), suggests three books: Service Breakthroughs , by James Heskett, W. Earl Sasser Jr., and Christopher Hart (Free Press, 1990); The Customer-Driven Company: Moving from Talk to Action , by Richard Whiteley (Addison-Wesley, 1991); and 20/20 Vision , by Stanley Davis and William Davidson (Simon & Schuster, 1991). "The first two will show him opportunities for service breakthroughs in his company; the last will tell him how to use the information within his business to revitalize it."

United Electric Controls is a manufacturer, but Bonnie Rafuse provides a service within the company, as education manager ("What Chief Executives Read," September 1990, [Article link]). She maintains a lending library of 300 books and cites Goal/QPC, in Methuen, Mass. (508-685-3900), as one of her favorite sources for new ideas. Goal researches, publishes, and consults, and hosts seminars on total quality management. You can call for its catalog of products.

For general advice on leadership, Sue Cejka, founder of Cejka & Co., a management-consulting company, twice on the Inc. 500, recommends The Unnatural Act of Management , by Everett Suters (Curry Publishing, Atlanta, 1989). "It tells CEOs in service industries how to get high performance out of their people."

But Matt Hession, CEO of Key Nursing, in Thibodaux, La., offers the same advice he gives all new hires: "I don't want to hear any of your ideas on changing the company for three months." After that time, write a profile of the company, including good points and bad, and ask someone older and "saltier" to do the same. The differences between the two profiles could show you where you jumped to conclusions. If you agree on problems, focus on fixing them, instead of looking for what Hession calls "a management cookbook."

-- Michael P. Cronin