The "New Normal" of Dealer Financing

The New Normal of Dealer Financing

The COVID-19 pandemic along with the impact it has had on the economy will continue to impact auto dealers. For some, it is leaving them in a crisis situation. Even the most stable dealerships can be left vulnerable, without any definitive plan to create, protect, and manage liquidity.

Unlike in other industries, the auto industry was not showing signs of robust and ongoing growth before this unprecedented crisis. Dealerships had been struggling to increase leverage all while managing shrinking margins.

The Lessons Learned

In 2019, when things were considered “good” from an economic perspective, many dealerships were experiencing serious financial hardships. At this time, it became clear that dealers needed to face the issues they were experiencing head-on – not waiting until the following month to find out if things were going to get better. The dealerships that waited to confront these problems saw this mild issue turn into a bigger problem that did not show signs of slowing down. In the past, the mindset of most auto dealers was to “sell their way out of the problem.”

While optimism cannot hurt, it is not a viable strategy. During challenging times, the intelligent reduction in expenses and the ability to restructure debt becomes both essential and urgent if a dealership wants to survive.

There are some lenders who have worked for several years to deploy capital into various dealership secured loans and flooring lines of credit. Even private equity firms have come onto the scene. There has even been a growth in automotive real estate investment trusts, which have effectively grown their dealership portfolios during the most recent 10-year growth and expansion.

However, even with all this enthusiasm, sales in the auto industry had begun to level off before anyone even started to hear the term “COVID-19.” Even the savviest ones had no idea this crisis was on the horizon. No one had planned or budgeted for this apocalypse.

This has resulted in many dealers being caught without enough working capital to make it through the storm. There were no lenders conducting stress tests to make sure they could handle a cataclysm of this size or impact.

Just like dealers are being forced to face this obstacle and not to hide from that which is inescapable, now is not the time for lenders to pull their offers and services off the table. They should also avoid playing hardball or following a generic checklist. It is not a solution for a dealer to go off trust and just hope that better times are coming.

Just like the remainder of the nation, lenders and dealers have to work together to return to a new sense of normalcy – regardless of what that means. No one knows how long COVID-19 is going to be around, how long shutdowns will continue, and how consumers are going to respond as the curve of economics and COVID-19 start to flatten.

The New Normal in the Auto Industry Related to Financing

The new normal for the auto industry, related to financing needs, is not yet clear. It is important to take some time to figure out what is going on and how it will affect your dealership now and in the future.

For example, big financing companies, such as Wells Fargo, are changing their interaction with auto dealers, which is something that has impacted many companies, especially those that are privately owned.

Fully understanding this is going to be essential to ensuring that an auto dealer will continue finding success and that they can overcome the difficulties that COVID-19 has presented to this industry.

Remember, the situation that is present now is unprecedented. What this means is that it is necessary for everyone to consider how the reduced financing options are going to affect them in the short and long term. Being informed, knowing the state of the situation, and knowing what to expect in the future will help an auto dealership know what to expect and how to plan for the future. This is essential for any dealership, regardless of where they are located or the type of vehicles offered.