Many dealers floored by floorplan limits, costs

Suburban Los Angeles dealer Mike Kahn said that last winter, Bank of America told him it didn’t want to renew his loans and raised his floorplanning interest rate “through the roof.” Photo credit: ALYSHA WEBB
The credit crisis — which has made lenders reluctant to finance dealerships' vehicle inventories — is helping force hundreds of dealers out of business.

The National Automobile Dealers Association 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.

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.

Mike Kahn owns a group of seven suburban Los Angeles dealerships, with both domestic and import franchises. The group had $500 million in revenue in 2007. It remains profitable overall, but one of his dealerships is losing money, Kahn says.

Main squeeze
Dealers say floorplan lenders are
•Raising interest rates
•Requiring more collateral for loans
•Shunning loans to Detroit 3 and second-tier import dealerships
•Recalling loans to unprofitable dealers

'Betrayed' by bank

Bank of America supplied two of Kahn's dealerships with $60 million in floorplanning, capital loans and mortgages. Last winter, Kahn says, the bank did not want to renew the loans and raised his floorplan interest rate "through the roof."

"I never felt so betrayed," Kahn told Automotive News. "You sign this agreement and they raise your rate. Or you don't sign and they put you out of business."

Bank of America spokeswoman Julie Westerman says the bank has not changed its lending policies toward dealers and is not trying to force dealers out of business. Still, Kahn says he has shifted his floorplan accounts to Nissan Motor Acceptance Corp.

Bill Adamson, a multifranchise dealer in Rochester, Minn., says Wells Fargo recently raised his floorplan interest rate by 1.7 percentage points. He declined to disclose his current rate.

Don Charbonneau, who sells General Motors and Chrysler LLC brands in Dickinson, N.D., says his floorplan rate is now 1.25 percentage points over the prime rate, up from 0.75 points. He finances his inventories through GMAC and Chrysler Financial.

Stephen Derby, senior vice president of commercial dealer services at Regions Bank, says some lenders are ordering dealers to pay off their floorplan loans. Other banks offer onerous terms to force dealers to look elsewhere for credit.

Tight fit

Derby quickly adds that his bank doesn't pursue such policies. "There are a lot of dealers looking for a new home," he says.

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.

Mark Johnson, a dealership consultant in Seattle, says some banks will not floorplan dealerships that sell Detroit 3 or minor import brands. "We tried to get a Kia deal done in Florida," Johnson says. "None of the banks would floorplan the Kia dealer — a good dealer with a lot of money."

Similarly, Suzuki dealers are asking American Suzuki Motor Corp. to launch a captive finance company to provide them floorplanning. Suzuki's current finance company, Nuvell, is owned by a GMAC subsidiary and does not finance dealer inventories.

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.

Harry Stoffer and Jamie LaReau contributed to this report

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