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Home >> Lending >> Business Credit
Problems with Floor Plan Line of Credit
On a floor-plan credit line, whereby the individual notes show specific collateral, can a bank arbitrarily start making advances for three times the collateral value without the president and guarantor? The president was required to sign each business note and business agreement with the bank, but not the individual notes for advancement of funds. Now, the bank wants him to personally pay for the advancement of funds that were extremely over-valued, and to boot, the bank did not hold titles to these questionable vehicles.
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 We can't comment on the terms of the floorplan agreement without seeing it. If the bank loaned more than the collateral value, that may be considered an unsafe and unsound practice, but the entire obligation and relationship must be considered. It may be under the terms of the flooplan that cross-collateralization exists, and other equity will cover this unsecured amount. It isn't illegal if that is what you're after.
As to the request for payment, the agreement and note with the bank will define who is liable and for what amount. In most cases, each signer of the debt is responsible for all of the debt. Lastly, the advances under the plan will be addressed in the plan itself. In some cases the bank wouldn't hold the title to the collateral. Doing that restricts the dealer from being able to quickly sell it. The bank may want to hold the title if it does the financing for the buyer, but it may allow the dealer to hold it and show it when an inspection of collateral is done.
Published on BankingQuestions.com 8/25/10
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