President Obama’s task force is looking into a solution to prevent the shuttering of tens of thousands of dealerships by making loans currently reserved for small businesses available to car dealers, making it easier for them to borrow money to get showroom vehicles.
“There are a lot of departments of government involved, but the task force agrees with dealers that credit is a significant problem,” says John McEleney, chairman of the National Automobile Dealers Association, to the Associated Press. “They wanted to know if we were seeing improvement in credit and dealer financing. We’re seeing some on the retail side but we still need help with floor plan loans.”
But the proposed solution would entail a change in Small Business Administration rules. Currently, most dealerships don’t qualify for SBA loans because they earn more than $29 million. An average dealer’s revenue is about $40 million to $45 million. So NADA is suggesting going to an employee-based size standard; the SBA considers a qualified small business to have less than 500 employees. A typical dealership employs about 55 people, including technicians.
The SBA noted that a similar temporary program helped dealers in the late 1970s. SBA Administrator Karen G. Mills, during her confirmation hearing a few weeks ago, indicated looking “seriously” to expand SBA lending to cover auto dealers.
A rescue of car dealerships could be good news for state and local governments that rely on the tax revenue that cars, a big-ticket item, bring in. In Burien, Wash., for example, sales taxes provide more than one-third of the city’s general fund; with auto and auto-parts sales accounting for more than a quarter of that amount.
If Chrysler LLC and General Motors Corp. were to file for bankruptcy, about 10,000 dealers from both companies could be in trouble and would need federal government assistance. Indeed, the administration has already helped out parts of the auto industry. In March, auto suppliers received a $5 billion aid package from the Treasury. In addition, the Treasury officials also designed a government warranty program for GM and Chrysler so that buyers would feel safe buying cars from the two troubled companies.
Both dealers had 1.1 million vehicles of unsold inventory at the end of the first quarter; they only sold 660,000 vehicles during that period.
Still, the small-business community already feels left out of government help, and may not approve of aiding big businesses whose dealers are competing for the loans it is trying to get.
Should the Obama administration allow car dealers to be eligible for SBA loans?
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