The Obama administration's pilot program that allows the Small Business Administration to guarantee floorplan loans to dealerships was a bold stroke to free up wholesale credit for dealers just when they needed it most.
But the program has failed to catch on in the way the administration envisioned. It must be expanded, strengthened, lengthened and simplified, making it more accessible to more dealers. And it must be done quickly.
Like many other small businesses, car dealerships were jolted by the credit crunch as sources of retail and wholesale credit dried up. In a letter to the SBA last week, the National Automobile Dealers Association said hundreds of small dealerships have lost their floorplan credit lines and had difficulty replacing them while more are in danger of losing their floorplans.
That's why the SBA program seemed like a godsend. The pilot program, which is set to expire at the end of September 2010, is authorized to guarantee bank loans for as much as 75 percent of loan amounts up to $2 million.
But since the SBA pilot program began in May, it has had trouble attracting lender participation. As of Monday, Oct. 26, the agency had approved the guarantee of just 24 loans totaling about $27 million from 21 banks.
Meanwhile, an NADA survey of lenders had discouraging results. The NADA survey of 40 banks, credit unions, captive finance companies and other institutions found that 19 are not making any floorplan loans.
Congress is on the verge of crafting a bill to improve the program. What's needed is obvious: Extend the program at least another two years, raise the loan limit and increase the percentage of the loan underwritten by the SBA, and reduce the red tape that discourages financial institutions from taking part. NADA also asked for the minimum loan to be reduced from $500,000 to $100,000, which would help the smallest dealers.
It is encouraging that President Barack Obama supports raising the loan limit to $5 million and the SBA guarantee ceiling to 90 percent of the loan's value.
But the administration must exert more pressure to persuade banks — especially those that took a federal bailout — to get with the program and start making floorplan loans to small dealerships to help them stock vehicles. That could be one of the easiest ways to stimulate the economy.