The threat of factory closure has diminished of late. This is good news to surviving dealerships. However, there continues to be pressure on dealerships to find and maintain adequate floor plan financing. The credit crunch has not abated.
As you all know, many banks are exiting the dealer floor plan market. Banks that are continuing in this market are extremely selective in accepting new business. They are also cautious in renewing relationships with existing customers. Banks are favoring dealers with solid balance sheets and stronger brands. Captive finance companies have limited capital available to loan and often times have a six month to a year waiting list to provide funds.
With the elimination of Chrysler Financial, surviving Chrysler dealers have turned to GMAC for floor plan financing. During the application process with GMAC, many Chrysler dealers were surprised to find out that GMAC rejected the loan because of capitalization and/or working capital concerns. Unless a dealer had the ability to inject unencumbered capital into the store, the loan would be turned down. Dealers that are turned down may have no other financing alternatives to turn to.
Some dealers that were terminated by GM or Chrysler are being notified by their bank that their floor plan arrangement will be eliminated once they sell off their new vehicle inventory. Dealers that cannot self finance their used inventory may be forced to close.
What does this mean to a dealer that will be coming up for floor plan renewal? In prior years, the renewal process may have gone smoothly and without a lot of questions. This year the bank may have more stringent guidelines in terms of your working capital and net worth. A dealer should be prepared to address this issue in advance and identify potential sources of funds to satisfy any new requirements. Most dealers will see their interest rate increase. In the current credit market, only the strongest dealers will be able to refinance to other banks / finance sources.
In conclusion, the reduction in financing sources and tightening of credit policies will lead to additional dealer closings. Dealers may not be content with new terms on their renewals. If you are not an “elite” dealer you may have to accept these renewal terms with the hope of refinancing or renegotiating in the future when credit policies loosen.
Downey & Company specializes in finance, tax and management of automobile dealerships. For more information or a free proposal, please email Paul McGovern at pmcgovern@downeycocpa.com or call him at 781.849.3100.
