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.