NEW YORK — Hundreds of thousands of new cars and trucks that would have quickly made their way to people’s driveways a year ago are now stacking up on dealer lots across the country, with potential buyers worried about whether they’ll keep their jobs, be able to pay for gas, or qualify for a car loan.
For auto dealers already suffering under the worst U.S. sales downturn in 15 years, the increasing cost of the credit they use to keep inventory in their showrooms means every Ford Focus and Jeep Grand Cherokee with a sale sticker in the window is chipping away at dealers’ razor-thin profit margins every day and threatening to send more of them out of business.
Like the banks that have been collapsing under the weight of the credit crunch, auto dealers are highly leveraged, making them some of its first victims, said Sheldon Sandler, founder of Bel Air Partners, a New Jersey-based firm that helps car dealers find options when they want out of the business.
“Car dealers are like the canaries in the coal mine,” he said. “The energy crisis had been affecting their revenue for a while. And now with the credit crisis, in some cases, banks are turning off their credit.”
Paul Taylor, chief economist with the National Automobile Dealers Association, said Friday that dealership closures spiked in September, prompted him to raise his forecast of closures. He now expects 500 to 600 of the group’s 20,770 dealerships to shut their doors this year, up from previous estimates of 300 to 400.
About 430 dealerships closed last year and 295 closed up shop in 2006, according to the NADA.
Car dealers get vehicles for their lots through a practice called floorplan financing, where the funds needed to pay for inventory are supplied by a lender. The longer the vehicle goes unsold and the higher the interest charged, the more it costs the dealer.
Ray Ciccolo, president of Village Automotive Group in the Boston area, said his financing costs have doubled in recent years. That’s had a “disastrous” effect, he said, on his six dealerships that sell Cadillac, Saab, Volvo, Honda, Hummer, Nissan and Hyundai vehicles.
In some cases, funds aren’t available at all. Ciccolo said one of his dealers recently expressed interest in picking up another franchise but couldn’t find a bank that’s willing to finance the inventory.
“I’ve been in this business for 46 years and this is the first time I’ve seen anything like this,” Ciccolo said. “It’s a perfect storm of calamity.”
Ciccolo, like many dealers, gets his financing through independent banks whose terms are based on the London Interbank Offered Rate, which measures the interest large banks are willing to accept on short-term loans. It’s the benchmark for about $10 trillion in corporate loans, mortgages and student loans around the world.
The recent turmoil in the banking industry has sent LIBOR up significantly as institutions become wary about lending to each other. The three-month LIBOR stood at 4.33 percent Friday, up 1.52 percentage points from a month ago but still lower than it was this time last year.
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