Dealers seeking access to cash often look beyond traditional lenders when evaluating options to buy out business partners, acquire new stores or renovate existing facilities. Historically, dealers have been able to access back-end cash from the sales of their F&I products through a variety of options, including retro commissions based on underwriting performance of their businesses, reinsurance company dividends and earned premium shareholder loans.
The number of options available to dealers has expanded in recent years, as some insurers and administrators have created programs to support advancing unearned premium reserves — the most common of which is supported by a model of what a dealer’s future earnings might look like. Not every product provider or administrator can offer these types of transactions, as it’s the insurer who generally dictates whether unearned premiums can be released and the terms under which those transactions can be accommodated.
While these models may vary from company to company, several key factors are evaluated when determining what portion of the unearned premium can be advanced through a loan, including the type of business being sold, product mix, earning methodology and trending loss ratio. In most cases, companies require dealerships to have a minimum of one-year writing experience before offering access to future profits.
The primary benefit of access to unearned premium is that it provides acceleration of earnings, rather than having dealers wait for profit to emerge through the standard earning cycle of contracts produced. In addition, dealers are attracted to the fact that it is typically a low-cost option. Since they are “borrowing” against future profits, interest payments accrue back to their own reinsurance companies.
Another option dealers can look to when leveraging their reinsurance portfolios is to seek a provider that allows outside investment of the reinsurance trust assets. Though unearned reserves are bound by the terms of the investment guidelines set forth by the insurer, some providers may have an option for funds to be managed by the dealer’s own investment advisor or another firm with the capacity to deliver a return greater than what can be earned with the provider’s own appointed investment advisor.
Although a recent trend, dealer advance loans now being offered by administrators, captive lenders and others have changed the landscape of how dealers can access cash. Under this model, a company offers a dealership an up-front cash advance in exchange for an exclusive commitment to only offer that company’s F&I products. These transactions generally involve a full evaluation of the dealer’s personal and business financial statements, tax returns and the implementation of a volume and exclusivity requirement.
The advance model is appealing to dealers who are looking for access to funds and are willing to abide by an exclusivity agreement regarding the sale of F&I products for a stated period of time. While it varies by provider, the cost of a dealer advance loan from a product provider or administrator is typically lower than what the dealer may be able to get through a traditional lender. Repayment of the advance is accomplished by assigning a loan repayment to each product.
While there are many ways for a dealer to access cash, it is important for the dealer and the agent (if applicable) to understand the benefits and implications of each type of transaction. This can be accomplished by a thorough review and understanding of the agreements provided to support each transaction. Early repayments, termination and exclusivity breach provisions should be carefully evaluated and understood before moving forward in any type of arrangement.