NEW YORK - Even though auto dealers today increasingly need funds for expansion and modernization, their traditional sources of capital - banks and captive finance companies - do not meet all of the demand.
To get the latest hot seller, or simply to keep their franchise, dealers are required to upgrade their stores, drop certain duals and/or move to the right suburb.
Industry consolidation also is driving buyouts. Buyers need purchase funds and sellers want to dress up their dealerships to attract buyers.
All of this requires money.
'It used to be, all you had to do was finance the inventory,' said Vernon Schwartz, CEO of Falcon Financial LLC, a startup finance company in Stamford, Conn.
'But there has been tremendous change in the dealership environment, which hasn't kept pace in the capital markets. There's an opening here for an entrepreneurial lender.'
To fill that need, Falcon Financial will specialize in lending for acquisitions, expansion and/or capital improvements. The company has deep pockets: It is 80 percent owned by SunAmerica Life Insurance Co. of Los Angeles, a subsidiary of SunAmerica Inc., a diversified financial services company with $46 billion in assets.
Schwartz said in an interview in New York that Falcon expects to make its first dealer loan in August. He hopes to have $100 million worth of loans outstanding within 12 months, and a portfolio of more than $1 billion within five years.
An average loan could be in the range of $2 million to $4 million per franchise, he said.
'The only way to survive in this business is to grow,' Schwartz said.
Falcon will have plenty of competition. The industry's two giants, Ford Motor Credit Co. and General Motors Acceptance Corp., also lend money for capital improvements. So do banks and other captive finance companies.
Mercedes-Benz Credit Corp., for instance, has aggressively pursued such dealer business. Mercedes-Benz of North America Inc. is demanding exclusivity in the 55 largest markets in return for the right to sell the upcoming M-class sport-utility.
Mercedes says dealers have committed around $300 million to various projects since the M-class requirements were announced a couple of years ago.
'It has definitely been a spur to the business,' said Bruce Lee, spokesman for Mercedes-Benz Credit.
But Schwartz said Falcon plans to offer better terms than the competition.
David Karp, Falcon's COO and CFO, said captive finance companies and banks might provide a loan against 60 to 65 percent of the value of a dealership's real estate.
But he said Falcon will lend more because it will consider assets other lenders do not count, such as the cash flow of the business or even 'blue sky,' the value of a dealer's reputation.
If other lenders lend against the value of blue sky, they do it 'begrudgingly,' Schwartz said. 'This is going to be a main thrust of our business,' he said.
UGLY DUCKLING LINK
Falcon is not SunAmerica Life's first auto venture. SunAmerica also was one of the original investors in Ugly Duckling Corp. when it went public a year ago. Phoenix-based Ugly Duckling is a chain of 'buy here, pay here' used-car dealerships.
The insurance company provides Falcon Financial with a line of credit, a war chest of funds to loan to dealers. When Falcon approaches the limit of the credit line, it plans to then securitize the loans. That is, it will sell the right to collect income from the loans to other investors.
SunAmerica will be a buyer of those asset-backed securities, Schwartz said. SunAmerica also is a major buyer of Ugly Duckling's asset-backed securities.
'There is a perception that the dealership business is highly cyclical and very risky,' Schwartz said.
But, 'what we've discovered is that the risk, compared with the (dealership) failure rate, is very, very, very low. At least as low as the restaurant business, and people lend money to restaurants all the time.'