REPORT: Credit lines increasingly hard to come by for auto dealers
Like him or loathe him, George W. Bush's clearest, most salient speech came almost a year ago on September 25, 2008 when our Harvard MBA president explained to the nation and the world exactly how bad the economy had gotten and why so much federal money ($700 billion-ish at the time) was being hurled at America's banks. The full speech can be found here, but one little section bears quoting:
While there have been signs of those gears getting a little bit of oil, certain sectors of the economy remain firmly stuck. Or as CNNMoney puts it, "auto dealers are in their own special financing hell." How so? It's a toxic combination to be sure. A car dealership's inventory is much more expensive than other small businesses (like, say, The Yarn Depot). Additionally, the economy as a whole is still fairly south of the border so despite Cash for Clunkers, millions of people aren't buying expensive things. Then, of course, the banks that lend the money are themselves going belly up, almost 80 so far in 2009 alone.The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses... Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.
To address the lose-lose situation, the Small Business Administration (SBA) is trying out several programs designed to help out dealerships. One such initiative sees the SBA backing the auto dealer loans. So far, only one dealership has qualified. The problem is that car dealers require a special type of loan known as a floor plan loan, and the SBA's program doesn't cover floor plan loans. These special loans allow dealers to repay the loan as the inventory sells, instead of on a monthly basis. And as inventory isn't moving like it used to, banks aren't keen on making any floor plan loans.
[Source: CNN Money | Image: Hulton/Getty]
Reader Comments (Page 1 of 2)
artandcolour 10:47AM (9/03/2009)
love the old dealership photo selected to illustrate the article. even though the '69-'70 Cadillacs are pretty much acknowledged to be, let's say, as quality challenged as Caddy ever was, that '70 Sedan de Ville looks so good right now!
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BrianFL 11:33AM (9/03/2009)
My brother had a 1975 sedan deville a couple of years ago and it was longer than my friends Dodge Ram quad cab. You could see the gas gauge move when you floored it too. LOL
dukeisduke 11:54AM (9/03/2009)
Amen, that's a nice looking '70 Sedan de Ville. That was the last year for high compression and big horsepower and torque, and Cadillac was still a status nameplate.
_Jon 10:55AM (9/03/2009)
Ford Credit, FTW.
(They do a lot of the financing internally for most of the Ford line of dealerships. Hence, they have huge profit, even when the parent company isn't doing great.)
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Power Beauty Soul 11:03AM (9/03/2009)
What's going to end up happening is dealers will carry a much smaller inventory. Manufacturers will need to either inventory cars at ports so a dealer can pull cars once they have a deal, or they will need to reduce the production lead time.
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fixitfixitstop 11:34AM (9/03/2009)
Yep. They're going to have to move to a more JIT production schedule.
John P. 11:05AM (9/03/2009)
Love the Caddy pic.
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travisty 11:21AM (9/03/2009)
Maybe it's just me, but I don't need 20 different models/colors/etc sitting on the lot to choose from so I can drive it off that very day (and all are usually over-optioned as dealers HATE selling cars without options). Give me one car in each trim level to see how it's going to drive and let me order the damn thing the way I want it. Dealers sitting on $2m in inventory (100 cars at $20k each) is just pointless...
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John P. 11:30AM (9/03/2009)
I agree completely. One, or possibly two of each model is plenty.
I actually would prefer the dealer order my car direct from the factory and wait a few weeks. I'd be getting a factory fresh car rather than some lot queen with test drive miles on it.
Len_A 11:39AM (9/03/2009)
Then you're both in a very small minority. The majority of car buyers, import or domestic, don't want to wait for a factory order, and that has been the trend for the last fifteen years or longer. They want to go out shopping, and find the car they want, and drive off the lot right there and then. As to the options level of new car inventory, some of that is driven (no pun intended) by the automakers themselves. All of the mainstream manufacturers, Detroit and transplant alike, have moved toward loading the cars as much as possible, to both improve the per-unit profitability of the cars, and cut manufacturing costs by reducing the number of manufacturing variables and reduce parts inventory costs. All of these things push the industry toward fewer dealers, with big lots of new car inventory, with the consumer's choices being slowly reduced toward interior and exterior colors.
Dan 12:23PM (9/03/2009)
A 6-8 week wait with all of the buyer's remorse and none of the new car smell is not what most people want.
All the more so when they're shopping out of a rental car because their last car was totalled.
BigWill 1:58PM (9/03/2009)
That plan totally ignores the reality of the situation, i.e. a lot of car purchases are either impulse or relatively quick decision buys. Imagine your car dies and you need to buy another. Are you going to want to wait 6-8 weeks for a new car? That's unlikely; you'll probably shop for a good certified/used car instead.
That will also be the end of negotiating price, so you can expect to pay sticker on cars made to order.
Keith Griffin 11:35AM (9/03/2009)
Johnny -
Good piece of economic reporting. Sums in clear terms what's happening with the automotive market and why dealers are going out of business. It's not just that people aren't buying cars. It's dealers can't afford to stock cars any more. Kind of a conumdrum, ain't it?
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gbgcarguy 11:45AM (9/03/2009)
The problem for dealers is the online inventory. If a customer does not see the car they want in stock they do not even stop in to order. They will click down to the next dealer listed to find the car they want, IN STOCK. Remeber the nearest dealer is only 2 inches down on the computer screen!!!
In our "I want it NOW" world, everyone demands instant gratification!!
You will find dealers without good cash flow keeping trimmed down inventories but any dealer that can, will stock up to take advantage of their competitors.
Just my humble opinion.
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Mez Jr 12:52PM (9/03/2009)
You make it sound like something that is good for the customer is bad?
Not having to stop into a dealer that doesn't have the car you want. Being able to go straight to the dealer with the car you do want. These are bad why?
Additionally, what's wrong with instant gratification in this instance? Dealer A has a car I want, I can afford to buy it, I go straight there and work out a deal. Still I see no problem here.
Apparently the ONLY problem is dealers may have a harder time grabbing people and pressuring them into a car that is not the exact car they want.
Which, sadly for the dealers is not going to make anyone lose sleep. Over the years the dealers have not exactly become sympathetic figures.
Jeff Johnson 11:53AM (9/03/2009)
I agree with what a few have said about sitting on multimillion dollar inventories. I do understand that that as Americans when we want to buy a car we want the instant gratification of signing the papers and getting the keys. That core idea is part of the problem, we refuse to wait for anything these days. Much like wanting a car now, we have become a nation of "i have to have it now" so I will put it on the credit card and worry about it weeks later. Even if you can't afford it in the first place.
There needs to be a fundamental shift in the attitude of people in this country if we ever hope to fix these problems, these problems of credit running out of control then collapsing has been brewing for quite some time. I will agree that not everyone has 15-25K sitting in the bank to purchase a car, but you need to be able to show up with more than 250 dollars to put down.
As a country we have not been "able to afford it" for quite some time - the recession sucks I agree, I havent had a job in 7+ months, and being self employed I can't draw unemployment, my point is people need to change from "gimmie gimmie gimmie - ill pay it later" to actually looking at what they can afford. The nation will recover and good times will flow again, the real question is: Will we have learned our lesson and changed the way we live? Probably not, which is sad.
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YUP 12:33PM (9/03/2009)
@Jeff
+1
akboss302 12:56PM (9/03/2009)
You're right on the money. There is so much crap out there that says "don't pay for 2 full years!" You could literally have NO money and get a zero-down mortgage over a 45+ year amortization, then go to a furniture store and outfit your entire house and 'don't pay for 2 full years!', and then get a brand new car with zero first payments and 84-month financing plan. The problem is people don't want to go 'backwards', but what they aren't realizing is that what we have is a house of cards, its not real. The market we have created has been artificially inflated by lending to people who don't have money to back it up, and really what we are seeing now is not nearly as bad as it could be.
If you came to a fork in the road and chose a path and it became perilous and dangerous, and you knew the other path was stable and secure, would it be wrong to take a few steps back to get on the right track? I'm not suggesting we throw away everything that has made our nations as great as they are, but re-evaluate the definition of 'making it', of satisfaction and of consumption. Having a piece of Humble Pie, as one would say.
Richard S. 12:37PM (9/03/2009)
What the dealers could do (with some push by the automakers) is to consolidate in a central lot within a certain distance radius all cars where all these participating dealers could get access to.
Thus the dealers would need less real estate and have fewer cars on hand, mostly as a demonstrator. Once the customer made a selection of color and options level the dealer would consult the database and see if the car is available in the central shared-lot and reserve it. Then someone from the lot would drive the car to the dealer for customer for final inspection and closing the deal.
This way a bunch of dealers are having access to more models while sharing the cost of holding such inventory. Of course dealers are competitors but if they are spaced apart with more territory (given so many closures) they are not as competitors as before and have more to gain than lose.
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Venom 2:02PM (9/03/2009)
That is actually an excellent idea.
They should probably hire you but they won't because you actually make sense.