Saturday, September 5, 2009

Floor Plan Financing

Small businesses are going south faster than the stock market was going up. Simply put, most smaller, regional banks are short on the capital necessary for them to access the Federal Reserve’s cheap cash (at or near prime), and they are definitely tighter on the standards they apply to borrowers. Particularly hard hit are auto dealerships, even those with incredibly good payback records. These dealers need money to buy at least the cars in their showrooms and on their lots (“floor plan financing”) – nothing to show, nothing to sell. The few customers who come to buy will leave without cars.

But hey, would you lend money to a car dealership? Really? And at what rate? The August 31st “‘There's been no progress in freeing up credit,’ says Scott Gorden, principal in charge of dealerships at LarsonAllen, a Minneapolis-based accounting firm that works with 600 dealers across the country. ‘Far and away, it's still the biggest issue faced by dealerships today. If you cut credit to them, they'll be closing. If they can't get the floor plan financing, they will shut down.’

Auto dealers' credit troubles started almost a year ago, as banks tightened their credit standards for small businesses in response to the deepening recession. But a bigger problem came when industry-specific lenders like Chrysler Financial, General Motor Acceptance Corp. and Ford … Credit began to pull back.

“‘They first became protective of their brand. So a Ford-Subaru-Volkswagon dealer would only get financed from Ford Credit for the Ford brands,’ Gorden says. ‘But then they started taking a look at the less profitable dealerships, and we had a number of clients who got notice from the [lender] or the bank that the financing would end in 30, 60, 90 days.’”

Recently the Small Business Administration offered a 75% guarantee to lending banks on these floor plan loans (as the dealers sell the cars, they pay off the loan), but the problem still doesn’t want to go away – seems that lots of banks don’t want a thing to do with the words “car dealership” involved, even where the government takes the risk! They’re avoiding the auto industry as if it carried an incurable social disease, and perhaps it does. Maybe that explains why the SBA has only processed one floor plan loan so far. No loans, sales staff gets laid off. No sales, eventually the dealership shuts down as well. And as Americans develop long-term, “spend very carefully and only when you have to habits,” an awful lot of retail will continue to exist only as a distant memory.

“Cash for clunkers” only went so far; there is the longer-term livelihood of folks in the car business to consider. Time is not on their side, and so whatever needs to happen to get direct loans into these dealers hands, let it be…. And then we need to add to that list the hundreds of thousands of other small businesses who are on life support, and who will shed their remaining jobs permanently without ordinary credit lines.

If the government can bail out those “too big to fail,” can it lend a hand with those who are too small to show up on the national radar screen, but who actually supply the bulk of American jobs? Or are we getting comfortable with the prospect of long-term high unemployment rates?

I’m Peter Dekom, and I approve this message.

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