February 2010, Auto Dealer Today - WebXclusive
Cash Reserves Aren’t What They Used to Be
I just finished attending a couple of conventions where I spoke on various expert panels and met with hundreds of dealers. I have spent many hours on the phone with dealers who have called wanting help to “stay alive.” I have spent hours on the phone with quite a few bankers also. We all talked about the same things. Dealers are in dire straits. This includes new, used and buy here pay here (BHPH) dealers, along with their related finance companies (RFC).
Dealers want and need financing to stay alive. I know financing is a dirty word but I said it anyhow.
Growth is also an improper business plan. Don’t even think about discussing this with your banker.
New Car Dealers
The Chrysler dealers I have talked to are mostly switching to GMAC for their floorplan financing. Most of them are getting approved. It has taken a while to get this done and hasn’t happened without some grief on the dealer’s part. GMAC wants dealers to put up some cold, hard cash in their CAP account to act as a “buffer” for the floorplan and prove they have some liquidity.
Now, in the worst automotive period in history, when the majority of dealers don’t have any excess cash, GMAC wants dealers to come up with extra cash (from somewhere) and deposit it in GMAC’s floorplan offset account paying one percent less than the dealers are paying GMAC on their floorplan line. This sounds fair doesn’t it? The amount seems to vary based on some method of madness, which makes no sense to me.
I know dealers with large amounts of available cash, good net worth, et cetera—in some cases, dealers who could actually own all of their cars without flooring them—who are being asked to divert money to this account. Wouldn’t it be better for the dealers to just have more equity in their inventory and pay off the amount of floorplan equal to the “required” CAP account amount? They could always floor those vehicles to obtain additional cash for operations if needed.
Lenders have now rewritten the interest terms in most term sheets and contracts I have reviewed. Instead of “prime plus” something they all have been converted to “floor plus” something. The interest rate floors are at least four percent to five percent. The “plus” has been from two to three percent instead of one to one-and-a-half percent. Now, if you look back to a short time ago and compare it to now, interest rates for floorplans and lines of credit have almost doubled from prime plus method due to the low prime rate we have currently.
So let me get this straight. We are paying quite a bit more for the same money, and we can’t borrow what we need or want. I just read the banks have an all-time high amount of cash available for loans but are sitting on it. They are afraid if they loan money in this current economy their risk of loss will increase.
Blue sky has been changed to a dark cloud. If you want to sell your franchises and get any amount of blue sky for them, you will have to wait it out until this economy goes back to some resemblance of the past. I hope you can hold out that long. Some dealers, not already terminated, will not make it through the end of next year due to poor capitalization, low new vehicle sales, poor economy, et cetera.
Other new car dealers have had some lines of credit revoked, decreased and/or not renewed. These lines of credit have been used for financing operations and growth at their stores. For now, the lines of credit can’t be relied upon to be there when needed.
Used Car Dealers
Used car dealers seem to be struggling as much as or more than new car dealers right now. For most, their indirect financing has all but gone away, making getting their customers’ deals bought in today’s economy difficult. Their sales have been dramatically reduced, resulting in monthly losses and cash drains on their available resources. And for many, their floorplan lines have been terminated or drastically reduced. Unless you have an established relationship with a good, strong local bank (and sometimes this hasn’t been enough), you will probably struggle to make it through 2010 based on the current economy.
BHPH dealers seem to be holding their own or growing their portfolios slightly. Many have closed some of their locations due to lack of increases in their lines of credit. They have been forced to scale back any growth plans they have been contemplating, and some have laid off employees trying to cut down on overhead.
For many years, growth was a good thing—not anymore. The theme I am getting from banks is the opposite. They want stabilization, net worth, positive cash flow, liquidity, and working capital., so dealers need to change their business model. You need to look at your business as if you are maxed out in sales and portfolio value. Your goal is to sell the same number of vehicles that are repossessed, plus those that are paid off. You need to keep your portfolio static, but start generating some positive cash flow. You need to manage your expenses to make a profit in both your dealership and your RFC. If you can’t, you need to reduce your expenses to get there. You don’t have choice for a while.
I am not forecasting gloom and doom. I am merely stating the facts as they have been presented to me in my many discussions with clients, potential clients, banks and finance companies. There are many good dealers who have been caught up in this economic mess who won’t make it through 2010. I am greatly saddened by this turn of events, as dealers with some long histories of successful operations won’t survive much longer. Banks have changed their philosophies to fund dealers who have a good net worth, positive cash flow, strong management, liquidity, diversified personal financial statement showing liquidity, et cetera, and they are shunning growth from every angle.
So, all that being said, it is time for you to start managing your entire balance sheet, not just cash, inventory or note portfolio. It is time to increase your cash position, lower your debt and decrease your overall debt-leverage ratio. Work at getting stronger with what you currently have, not by expanding your business. That will have to wait until financing options become somewhat more realistic.
Take care and good luck. I hope to see all of you at the end of 2010.
Vol. 6, Issue 12