Tim O'Brien | Nov 14, 2008

The crisis affecting 'floorplan' credit to new car dealers is wider and deeper than many industry commentators realise. The withdrawal of credit services by GE and GMAC puts at risk potentially 30 percent or more of new car dealers in Australia. This problem has the potential to compound further as the future of other financiers to the sector is uncertain.

There are doubts about Ford Credit's intentions and future in this market. Its parent is in dire difficulty in the US, and flagging Ford sales here (and large dealer inventories of slow-moving stock) will not be helping. Loss of another financier would turn crisis to disaster.

This is a grim time for the sector and for the families and the family businesses caught up in the credit meltdown. Country car dealers, who traditionally do not write as much consumer finance (or 'retail paper') on the cars they sell as larger metropolitan dealerships, are particularly exposed.

This is why.

The provider of the wholesale finance (the floorplan) to dealers has traditionally taken a low return on this financing – often around the 90 day 'bank bill' or 'commercial bill' rate plus 1%- 2% (though for many, this has now risen to 3.0% - 3.5% above commercial bill rates).

The financiers do this because they then benefit from the 'retail paper' the dealer writes; that is, the finance the dealer sells to you and I should we choose to finance through the dealership. There is a good margin in that finance for the financier, and, when things are good, and cars are bolting out of showrooms, profits to the financier are high.

Country dealerships however are not such cash-cows for financiers. The amount of retail paper they write is generally significantly less than city dealerships, as a proportion of sales. Thus, for the financier, country dealerships provide less access to the more profitable consumer finance market while also, because they rely on smaller markets, represent greater risk in downturn.

The credit problem for dealers is further compounded because their contracts with manufacturers usually (read: always) stipulate minimum stock levels and also contain enforcement provisions requiring them to take deliveries as per their franchise agreement.

So, if sales are slow, dealers have the dual problem of carrying floorplan finance on unsold stock, at the same time as yet more new car deliveries arrive at the door for which they then have to find finance.

Every unsold vehicle, especially those unsold beyond the term of the 'floor plan' and for which they may have had to 'pay down' part of the loan, chips away at profitability and threatens to drive them to the wall.

A dealership with slowing sales, and growing unsold inventory and overheads, looks increasingly like a bad risk to financiers. Many of those dealers who were with GE and GMAC have a real problem on their hands finding alternative financiers. (A middle-rung dealership can carry upwards of $5 million in new car floorplan, plus $2 million or so in used car floorplan, and may have to turn over upwards of $800k a month - through parts, servicing and showroom sales - to break even.)

Can you see why dealers are between such a rock and a hard place at the moment? And why country dealerships who have been abandoned by their financiers are particularly exposed?

Industry bodies such as VACC and FCAI are calling for time, Government intervention and a "temporary fund pool" (The Australian, 12/11) to give affected dealers time to find alternative floorplan providers. Some dealers have been with GMAC for decades and were given only 60 days notice of its intention to abandon ship, leaving many of their dealers up that well-known creek without a paddle.

The Government appears to have noticed. Senator Steven Conroy, in answer to a question in parliament (12/11) said, "The government is certainly aware of the difficulties that finance companies, including automotive finance companies, have been facing this year as a result of the financial crisis. That is why Treasury and regulators are examining, in consultation with the industry, the impact of the financial crisis on finance companies and will provide advice on what actions might be appropriate to support this sector of the economy."

Many regional and rural communities may be asking the Government to get cracking. Car dealers are often large employers in regional towns and cities. This is not a time for another committee; country businesses and regional communities have suffered enough over the past five years from extended drought and declining rural incomes. It is time for action.