The credit crisis — which has made lenders reluctant to finance auto dealerships’ vehicle inventories — is helping force hundreds of retailers out of business.
Automotive News reported that the National Automobile Dealers Association (NADA) projects that as many as 700 dealerships could close this year, out of 21,461 as of Jan. 1. The last decline of this magnitude occurred during the recession of the early 1990s.
Auto dealers have fallen prey to poor sales, high gasoline prices and ruinous price wars. But a lack of credit is a big factor in this year’s shakeout, says NADA chief economist Paul Taylor. “Credit conditions need to be improved somehow, and quickly,” he says.
In recent weeks, each of the Detroit 3’s captives — GMAC Financial Services, Ford Credit and Chrysler Financial — has raised the interest rates it charges dealers for inventory financing by about half a percentage point.
Major banks such as Bank of America and Wells Fargo also have increased interest rates on dealer inventories, or floorplans. At the same time, many lenders are demanding more collateral for floorplan loans.
Some lenders are refusing to floorplan unprofitable dealerships, to the point of recalling their loans. And sluggish car sales have made a bad problem worse. U.S. new-vehicle sales are at their lowest point in 15 years, so dealership inventories — and thus their carrying costs — are bloated.
Even profitable dealers are feeling pressure. Carl Woodward, a dealership accountant in Bloomington, Ill., says independent lenders this year dropped three of his 100 clients. Woodward declined to identify the dealerships, other than to say all are profitable and have found new floorplan lenders.
Some relief is on the way. Congress’ $700 billion Wall Street rescue plan, passed Friday, is designed to make both commercial and retail automotive credit more available. Last week, key lawmakers said the Federal Reserve also has authority under “extraordinary circumstances” to make special loans for dealers’ inventory costs.
But government acquisition of troubled loan-backed securities will take time. Until then, dealers will have to cope with their credit miseries.