Car Dealership Loans

Selling vehicles has been one of the most profitable ways for thousands of business owners to make a living. Getting financing to cover expenses at your own car dealership business doesn't have to be hard. This guide to car dealership loans has you covered.

If you love cars and have an eye for value, then you may consider opening a car dealership. With consumer car financing readily available to car buyers and the automotive collectibles market booming, more and more people have entered the ranks of registered car dealers.

To be clear, we're not only talking about the mega-franchise car dealerships off the side of the highway in almost every town in America. Business ownership in the specialty or independent car dealership marketplace is exploding as well.

Before we jump into a discussion of car dealership loans and how to finance your own dealership, let's first talk about some of the dynamics of a car dealership and how it works. Then we can cover exactly how to go about getting auto dealership financing.

First, let's start with the basics. Did you know that many registered car dealers are single person businesses? That's right, but we tend to associate large, exclusive name-plate franchise dealerships like Ford, Chevrolet, Honda, Toyota, etc., with the business of car dealership. While these larger businesses account for most of the total car sales across the country, independent and specialty dealers have been around for a long time and account for a significant portion of the used car market sales. According to the National Auto Dealers Association there are 16,708 franchise dealerships in the US versus 20,000 independent dealerships.

Car Dealer Financing - The New Car Marketplace

New car purchases (passenger vehicles and light commercial vehicles) have plateaued in the last year after reaching a record 17, 547,028 units in 2017 according to Trading Economics; yet they have remained above the 17 million mark since breaking that mercurial record two years ago.

Once thought to be an impenetrable industry in many areas, new car dealerships are flourishing according to IBISWorld even as a wave of consolidation hits the retail car dealership industry. New car dealer financing is available from a variety of sources today compared to just a decade ago.

A car dealership franchise varies greatly by car manufacturer. The top selling makes such as Honda and Toyota could be between $250,000 to $500,000 respectively. Domestic manufacturers such as Ford can charge as much as $30,000 for franchise rights.

Costs of Financing a New Car Dealership

In addition to franchise fees, you will need to calculate the cost of inventory. Many manufacturers will provide some level of financing for initial inventory to hold in your lot or showroom, however, this type of financing is generally short term and frequently needs to be replaced by secondary financing. Bank financing or other specialty financing using the cars as collateral is generally the rule in this case.

Facilities costs and technology infrastructure is another cost to consider. Building your showroom and leasing property to house your inventory will represent a significant expense. In addition, it is often a franchise requirement to build and maintain a service facility to provide warranty repairs and maintenance. You can quickly recoup these costs, as repairs and maintenance are significant revenue sources for a franchised car dealership.

Finally, you will need to factor in what are referred to as soft costs, such as personnel, insurance, and advertising. New car sales are a very competitive business, and in densely populated areas, most operators have annual advertising budgets in the millions of dollars.

Car Dealer Financing - The Used-Car Market Dealer

In the past, an independent car dealer would focus on vintage or hard-to-find vehicles, mostly dealing in high-end used cars. A dealer would focus on locating hard-to-find cars for wealthy individuals, and then "flip" (quickly resell) the vintage car to a ready buyer for a profit. This is highly specialized work for a dealer because it requires that you network to find and retain ready buyers, understand the nuances of collectable car values, and know how to evaluate the condition of a car. Selling used collectable or antique cars is very much like selling art; beauty (and value) is in the eye of the beholder.

A bit more than half (54%) of independent car dealers sell cars in the $5000 - $10,000 range, and a majority of this group sells cars that are from 6 - 10 years old. In 2018, approximately 3.9 million used vehicles re-entered the marketplace from coming off lease and off fleet, and from reposession.

Most of the vehicles coming off lease are resold by larger franchise dealerships. With the introduction of the "certified pre-owned" concept, franchise dealerships were able to maintain control over this class of used inventory and provide some measure of assurance to a buyer, and, most importantly, significantly raise the price of a used car.

Independent Car Dealer Marketing

Most important to an independent car dealer is the network and ability to find the right buyers. If you don't have the means to get a prime retail location or a big advertising budget, you have to get creative.

Like an antique furniture dealer, the antique or collectable car dealer must be patient and make it known that he or she is in the business of buying and selling pre-owned vehicles. Marketing efforts may include ongoing advertising, appearance at trade shows and auctions, and having a physical location. In many states, maintaining a physical location in a properly zoned area is a requirement of becoming a registered car dealer.

Important:

Many states wish to discourage casual car dealerships that operate from a home office. In most states, car dealership licenses require that you maintain a business address in a commercially zoned area of town. Between license fees and setting up your dealership facilities, be prepared to spend into the tens of thousands of dollars. For many dealers, this is an acceptable cost of doing business. Not only are car dealership licenses necessary to operate from a regulatory level, but also a registration is required at most dealer auctions; that's where most dealers buy their inventory.

Becoming an independent car dealer is a highly speculative business and not recommended for beginner car dealers. Typically, in this type of car dealership, the dealer makes a purchase of the vehicle with the expectation that they can quickly sell it for a profit. During the period of ownership, the dealer incurs what is known as carrying costs, or any costs associated with a purchase. That may include car dealership loan interest and fees as well as the opportunity cost of the money used to purchase the vehicle, and any other costs to maintain or restore the vehicle before resale.

Some vintage cars can be worth millions on the high end; typically they can sell for a few hundred thousand dollars. Understanding technical and mechanical details and having the ability to identify damaged or worn parts and accessories is critical. Many dealers are also mechanics or body work specialists; these skills can greatly reduce the costs associated with repair and restoration. Take note of any special skills you may or may not have; determine whether you can afford to pay for these services and still make a profit if you cannot perform them yourself.

Car dealers who routinely purchase and refurbish older vehicles have several financing options, depending on the nature of the projects. It is not uncommon for restoration projects to take several months in some cases. However, most dealers will strive to turnaround restoration and repairs in a matter of weeks. After all, time is money. Short-term interest rates on a car dealership loan can cut into profits, so it's important to know what type of financing is appropriate for the project duration and total holding time before resale.

Expenses Associated with Car Dealerships

Lot/Office/warehouse space

Most states require you to have commercially zoned space to operate as a car dealer. Depending on the work that you do, the number of cars you will carry in inventory and the services you plan to offer at your facility will dictate your space requirements.

In many cases (in most states) dealers are required to have an office space at their place of business. It is rarely acceptable to have only an empty parcel of land or a parking lot as your place of business. The size of this office space varies from state to state and may even allow a trailer or other temporary structure.

WarehousingAndFullfillment.com found that the 2017 average rental rate for warehouse space in the US was $6.53 per spare foot. To calculate your rent, you would take the total square footage, multiply it by the price per square foot, and divide that by 12 (months).

Let's say you found a warehouse space that is 2,000 square feet, and the owner is leasing it at a rate of $5.50 per square foot. To arrive at our monthly rent for that space we first multiply the total (rentable) square feet (2,000) times the cost per square foot ($5.5) to arrive at total annual rent expense of $11,000. Then we divide the $11,000 by 12 (months) and arrive at a monthly rate of approximately $916.66. (Total square feet x rental rate) / 12 = monthly rental expense.

Insurance

You may wish to consult an insurance broker and your attorney when considering your insurance coverage. Naturally, you'll want to insure your inventory with a property and casualty policy to cover the perils of fire, theft, or damage. In addition, you'll need to consider liability coverage, especially if you will be conducting test drives. Depending on your volume, this could cost up to $5,000 per year for a small operator for a coverage limit of $500,000.

Auto Dealer Surety Bond

All states require a car dealer to be bonded. The surety bond is designed as a protection for consumers in the event that a dealer defaults or there is a faulty transaction. The bond acts as an insurance policy for the independent dealer's business partner as well as the dealer's customers.

Marketing

Marketing and advertising expenses for franchise dealerships can cost millions of dollars each year. In medium-sized markets with a competitive landscape, be prepared to spend several hundred thousand dollars yourself.

Proven advertising mediums include radio, television, newspaper, and direct mail. Naturally, online advertising is becoming a bigger and bigger factor in effective marketing and advertising. The good news is that syndicated research shows that car dealership advertising has a high rate of return on investment. If you know you're going to spend a lot on advertising, consider retaining the services of an advertising agency. Advertising agencies can sometimes lower youroverall media expenditures by negotiating advertising rates efficiently and getting you a better return on the creative messaging.

Like many companies, most of your overall business will come from repeat customers, so don't forget that you should allocate a significant portion of your resources to client retention.

Utilities

Prepare to budget for basic utilities such as electric, heating, and internet/phones. This is usually under $400 - $500 per month.

Repairs/Restoration/Parts and Materials

Aside from the acquisition costs of the vehicles themselves, this category can be one of your biggest expenses. If you are involved directly in the restoration of the vehicles, you may want to list out any specialty equipment you will require.

Car/Inventory Purchases

And last but certainly not least, vehicle purchases are clearly the largest expense most car dealers can make.

Car Dealer Financing: Getting Started

Based on some of the expense factors discussed above, you can begin to define your car dealer financing plan. Car dealer loans and other types of business funding have become highly specialized, giving you more options than ever before.

As with other types of businesses, it is often wise to consider a hybrid car dealer financing approach. This means using some or all of the financing methods above to achieve a blended funding outcome. Making the right choices can save you thousands of dollars.

New Car Dealers

Manufacturer Financing/Inventory Financing

It is very common for the franchise manufacturer to extend credit to its franchisors, or have arrangements with financial institutions to extend funding to car dealers based on the inventory they maintain. This type of car financing is similar to equipment financing in the sense that the inventory (like the equipment) is used to collateralize the loan. Inventory financing may carry lower interest rates than term financing due to the fact that in the event that you default, the lender would take possession of the vehicles.
Traditional Bank Loans

Banks are still the leading provider of car dealer loans. However, due to the low risk involved in lending to car dealerships, operators will find a healthy competitive environment for borrowing, often resulting in lower interest rate loans. Individuals with above-average credit can get an even lower interest rate, and can negotiate or even eliminate any up-front fees, getting favorable, flexible repayment terms.
Business Line of Credit

A business line of credit may also be an ideal way to arrange car dealer financing. With a business line of credit, you only pay interest on the amount that you borrow, but you can draw up to your limit at any time. This may be a smarter way to fund unexpected expenses for your car dealership business; however, it might cost more to borrow than a conventional bank loan on an APR basis.
Equipment Financing

For dealerships that perform maintenance and repairs, the cost of acquiring and maintaining high ticket equipment like lifts, compressors, welding equipment, specialty painting rooms, etc., may be overwhelming all at once. Equipment financing allows you to use the purchased equipment as collateral, freeing your other business assets as collateral for other dealership financing needs.

Independent Car Dealer or Collectable/Antique Dealer

Traditional Bank Loans

If you have exceptional credit as well as an established track record of buying and selling high-end antique cars, a traditional bank loan may be the best option for your car dealer financing needs. Individuals with above-average credit will get a low interest rate, can negotiate or even eliminate any up-front fees, and get favorable, flexible repayment terms.
Business Line of Credit

A business line of credit may also be an ideal what way to arrange car dealer financing considering the timing of expenses. With a business line of credit, you only pay interest on the amount that you borrow, but you can draw up to your limit at any time. This may be a smarter way to fund unexpected expenses for your car dealership business; however, it might cost more to borrow than a conventional bank loan on an APR basis.
Equipment Financing

For dealerships that perform maintenance and repairs, the cost of acquiring and maintaining high-ticket-price equipment such as lifts, compressors, welding equipment, specialty painting rooms, etc., may be overwhelming all at once. Equipment financing has a few benefits that fit nicely into the car dealer financing suite of borrowing. This type of Equipment financing allows you to use the purchased equipment as collateral, freeing your other business assets as collateral for other dealership financing needs.

Car Dealer Financing - Summary

Financing any type of car dealership will usually involve multiple loan instruments. It is always best to begin with your bank, where you already have open accounts, and work your way down the funding options outlined above. The ideal loan for your car dealership is likely an SBA loan. Ask your bank if they are an SBA authorized lender, and remember to always shop around, since bank loans can vary widely, even for the same borrower.