VIDEO: Cross-Collateralization – Georgia Car Law Authority

Using your local bank for Floor Plan Financing may not be all roses and butterflies. Your local bank may require you to pledge other assets in order to get dealer financing. What does that mean?

Simple. You could lose your house if you default on your Floor Plan. Check out this three-minute video for tips on what to look out for so you don’t make a big mistake.


Below is a transcript of the video:

As a dealer is looking into using their own bank or the bank where they have an existing relationship for floorplan financing, one of the key concerns and really, really important thing to note on the financing agreement, is collateralization, specifically cross-collateralization. What that means is, remember, we talked about security and about how a floorplan agreement will be secured by the vehicle, but may also be secured by the other vehicles on the lot. In the cross-collateralization world, one agreement can be secured by another agreement and that a default of one can be a default of all.

cross-collateralizationLet me give an example. Let’s say a dealer has a home mortgage, a business loan, and a floorplan financing arrangement with Truist bank, just as an example. If the dealer defaults on the floorplan financing and if the agreement is that they’re cross-collateralized ( all the loans are basically pooled into one), then Truist could announce a default or notify the dealer of a default on all the accounts.

Let’s say the dealer is paying their home mortgage on time and they are paying their business loan on time. But then the floorplan financing hits them and the dealer doesn’t pay the floorplan financing on time and goes into default. While that bank may have the ability based on the contracts, the cross-collateralization, and the terms of those agreements, the bank may actually be able to call all of the loans due, including the mortgage that’s being paid on time and the business loan that’s being paid on time.

Again, that would be contained in the language of the contract. It’s not something that is just implied. It’s not something that comes along with having multiple agreements. It will be in writing if it exists. But it is definitely something to be aware of as a dealer is considering using an already existing relationship as a floorplan financing source.

 

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