Banking is in free fall. Fear of job loss and criminal sanctions have bankers stuck. There is no life preserver of rules or guidelines to cling to, only penalties for mistakes.
Add to that the car dealer, a modern-day gambler with an appetite for risk, a penchant for fast decisions, and a huge appetite for debt. If ever there was a profile that could strike fear in hearts of lenders, this is it.
But, dealerships need mortgages, building loans, capital lines, and floor-planning credit. Even a small dealership needs between $5 million to $10 million to operate. Historically, that kind of debt was so abundantly available, a dealer could pick from a menu of lenders. Not anymore.
This all began a few years ago when bankers, squeezed by near-zero rates and dramatically escalating back-office costs, needed to add a few tricks to achieve their bottom line.
Many bankers found salvation in charging fees for just about everything. Transactions, deposits, checks, origination, renewal. If it could be measured by a clock, a calendar or an adding machine, bankers banged it by a percentage or a fee.
Even when those costs were hidden from the dealer, they were assessed internally against the account and showed up in decisions for renewal or line increases.
This is largely why on news of even the slightest financial reversal, many dealers with unblemished payment records were receiving unprecedented pressure to recapitalize or get out.
Even good dealerships were being labeled “unprofitable” despite debt repaid like clockwork. If the amount of revenue a dealer offered a lender didn't measure up, someone behind closed doors was thinking pink slip.
A marginal account might first get a strong pitch to buy more services or pay a higher rate, or both. Less attractive borrowers would simply be given the boot.
Until recently, dealers evaluated their debt in the most simplistic of terms. Can I pay the interest? Do I have a car in stock for each car on my line? Even some of the most complex financial transactions rarely went beyond a question of whether a bigger mortgage could be justified by a few more service bays, a better location, or, for a face lift, by a better allocation of hot product.
Today, all dealers recognize the importance of a strong bank relationship.
But the savvy dealer also knows both his debt-coverage and debt-to-equity ratios.
The smartest dealerships are employing comptrollers and outside auditors that not only know how to close the books by the 15th of the month, but also have a good handle on weekly cash flow needs, the dealership's financial covenants, and the importance of signaling the dealer when business is slipping.
Modern banking demands reliable, predictable borrowers.
The first step in the right direction begins with strategies, tools, and disciplines that add stability to the volatile business of car sales. The key is achieving asset efficiency measured in inventory and human capital.
This is often attempted through the use of information technologies, but more likely accomplished by the engagement of outside experts who can deliver ongoing discovery and training for an internal staff easily overwhelmed by the complexity of dealership life.
Dependence on a static group of insiders to both keep up with the demands of retail shoppers and stay on the cutting edge of the marketplace is a low-percentage strategy.
Retailers who heavily rely on internal resources often become flabby and dull. The first signs of failure among those dealerships include excess staff, inflated payroll and lackluster sales.
To the contrary, a common profile shared by the most dynamic dealerships is a remarkably lean high-energy staff that is well trained and generously rewarded, bolstered by the use of consultants.
Breakthrough dealers and manufacturers will be those who “get it,” not the ones waiting for the magic of the next slick deal, hot car or catchy ad campaign.
Peter Brandow is a veteran dealer in Pennsylvania and New Jersey.