What Happens If You Can't Fix a Broken Auto Dealer

“You can't fix a broken auto dealer,” declares Bruce Harris, vice president and chief risk officer for Volkwagen Credit Inc., noting that several auto dealers are hurting.

Many dealers face the combination of a severe sales slump and unavailable credit to purchase new inventory. Some auto retailers are going out of business as a result. That's almost inevitable, considering the circumstances, Harris says.

“Too many dealers trying to sell to fewer customers won't work anymore,” he says at a recent Auto Finance Summit in Las Vegas. “If revenue streams have dried up and if customers aren't there, risk-based (loan) pricing isn't going to help.”

Paul Kramarz, American Honda Finance's manager-risk and analysis, agrees. “In a bad economy, you can't price your way out of credit losses.”

The National Automobile Dealers Assn. says the No.1 issue facing dealers is a drought of floor-planning credit, making it hard to borrow money for inventory purchases.

Cautious lenders are asking two questions when it comes to floor-plan financing, Harris says. “One, where's the repayment going to come from? Two, if that fails, then what?”

He adds: “If you can't answer those two questions, you shouldn't make the loan. When you get someone like the Bill Heard dealership group that was around for decades and then files for bankruptcy, well there is not much to talk about.”

Dealers with problems should try to fix them fast, says David Shevsky, director-consumer credit risk management for GMAC Financial Services. “Now is the time to put processes in place and keep them in place.”

Lenders are keeping an eye on dealers, trying to assess which ones are financially healthy and which aren't.

To many lenders, “the biggest risk right now is floor-plan,” says Chuck Roscow, Chevy Chase Bank's senior vice president-consumer lending division. “It is important to do floor-plan audits.”

“It's time to look at the dealer base,” says Dawn Harvey, administrative vice president of M&T Bank. “There are people who aren't going to be here in a few years.”

About 1,000 dealers are expected to go out of business this year.