The recession has been tough on Connecticut’s auto dealers, with 55 shuttering their showrooms since 2008. Despite the federal “Cash For Clunkers” program, auto dealers are still struggling, in part because it’s difficult for them to find financing to buy new cars from auto manufacturers.
Their struggle won’t be helped by the recent failure of Dealer Capital Group, a company that was looking to develop a major financing entity for local auto dealers for the past seven months, but has been unable to raise enough capital from local banks.
Since the onset of the financial crisis, many floor plan lenders have pulled out of the market or raised their rates and terms, leaving many local dealers out in the cold.
A lack of floor plan financing has been a leading factor in the collapse of dealers who, without a line of credit, were unable to stock up on new cars.
Floor-plan financing, also known as inventory loans, allows dealers to purchase vehicles from manufacturers and display them on their lots until they find a buyer.
Not Sufficient
Connecticut-chartered Dealer Capital Group was an attempt by former bankers to assemble a network of locally based community and regional banks to pool their funds to provide floor plan loans to local auto dealers.
Chris Peck, president and founder of the company, which operated out of Massachusetts, said the current competition “is still not sufficient to drive a good market” and he is disappointed his company couldn’t be a solution to the problem.
“We were unable to get enough lenders involved,” said Peck. “Without the proper funding, we can’t get the business going.”
Peck said Dealer Capital needed to raise between $50 million and $75 million from at least three banks to get started.
The company could have begun making loans with as little as $25 million, but weren’t able to raise even that much after approaching as many as 40 banks in Connecticut, Massachusetts and Rhode Island, he said.
Most banks wanted to see some success before committing, Peck said.
Others lacked interest because they didn’t care for the auto industry or were unfamiliar with floor plan lending, which has traditionally been done by large regional or national lenders.
As a result, Peck decided to scrap the Dealer Capital concept.
“It was a good idea and there is a major need for it, but the timing in terms of being able to raise capital was not good,” he said. “There is still a lot of hesitancy for banks to make loans.”
Some Improvements
James Fleming, president of the Connecticut Automotive Retailers Association, said that although floor plan financing continues to be a problem, there have been some improvements in recent months for auto dealers.
“This time last summer and fall as credit markets were seizing up, companies like GMAC and Chrysler Credit Corp. were unable to lend at competitive rates,” Fleming said.“Since that time, the federal government has dumped billions of dollars into the credit markets, which has helped open up some lending.”
Fleming said there have been some major changes in floor plan lending in recent months including General Motors Acceptance Corp., General Motors’ former credit arm, taking over many of the customers previously serviced by Chrysler Credit Corp.
Additionally, some major lenders are considering getting back into the business, including Bank of America and Chase.
That may be a reason why some banks didn’t get involved with Dealer Capital, Fleming said.
Meanwhile, Sovereign Bank, which sent letters to 45 Connecticut car dealers late last year warning them that they were pulling out of the floor plan business, has kept credit flowing to a few car dealers in the state.
One of those is Simsbury-based Mitchell Auto Group, a long time Sovereign customer.
President Mark Mitchell said two years ago, he had $24 million in financed cars on his lots compared to his current $5 million inventory.
“Our situation is much better,” Mitchell said. “Our vulnerability has lessened considerably.”
Still Tough
Despite some signs of optimism, however, some say there are still major problems plaguing dealers.
“It’s still pretty tough out there,” said John Spatcher, a partner in the dealer services group at Blum Shapiro, an accounting firm in West Hartford.
Spatcher said many of his clients are still seeing their interest rates continue to increase, while several Sovereign customers still need to find alternative financing.
He also said that since GMAC took on so many dealers, it is beginning to look closer at them, which could lead to higher rates.
