Complement Existing Business LinesWholesale 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 RelationshipsThe 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 YieldCompared 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 PortfolioWholesale 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.
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.