New Jersey auto dealers face tough times as credit dries up

Oct 26, 2008 (Asbury Park Press - McClatchy-Tribune Information Services via COMTEX) -- COF | Quote | Chart | News | PowerRating -- Today's tough credit environment is threatening to slam the brakes on Adam Berlin's used-car dealership in Asbury Park.

In mid-August, Berlin's banker, Capital One Financial Corp., informed him and about 20 other dealers in New Jersey and New York that it was ending credit lines the dealers use to buy cars for their lots.

It is "devastating," said Berlin, a 35-year-old Freehold Township resident who started Sports & Imports more than six years ago. "At a time right now when I should be focused on selling and moving inventory, I have been sidetracked and mentally exhausted trying to find a new lender, which has been impossible."

For auto dealers, as for many businesses, credit and financing are their lifeblood. Credit lines, called floorplan financing and which can run into the millions of dollars, are used by dealers to buy vehicles for their inventory.

Lenders are paid back when a car is sold to a customer, just as a consumer would pay a credit card.

Troubles in the worldwide economy have played havoc on the credit markets, as banks cut down on lending to each other and keep a tighter grip on money loaned to consumers and businesses. It has put pressure on car dealers, such as Berlin.

Berlin is down to 10 employees from 27 in May, as he trimmed expenses. If he doesn't find a new lender by next month when his credit line ends, he may go out of business. "I am still actively looking, but the outlook is very grim," Berlin said.

The credit crisis, coupled with lower vehicle sales and overall economic troubles, has helped to create a "perfect storm" for dealers, said Sheldon J. Sandler, founder and chief executive officer of Bel Air Partners, a Montgomery-based financial adviser to car dealers. "It is very hard. The terms for banks to lend money to support their inventory is tightening."

Some dealers are seeing their financing plans canceled while others are seeing interest rates rise, said Paul Taylor, chief economist at the National Automobile Dealers Association. "It is causing some dealers a fair amount of stress," he said.

The NADA estimates that 600 to 700 new-car dealers, out of 20,700 open at the beginning of the year, will close this year as a result of the turmoil in the industry, Taylor said.

He noted that international efforts to stabilize the credit markets should help lower rates over the coming weeks. Some dealers also are seeing lower rates because short-term rates have come down, he said. "It's a mixed picture," Taylor said.

In the last several months, there have been some changes. Finance companies, including GMAC Financial Services, Chrysler Financial and Ford Motor Credit, have announced interest rate increases for dealer inventory financing.

"We are also seeing stress in the market given the current credit crisis," GMAC spokeswoman Sue Mallino said.

Capital One spokesman Steven Thorpe said the bank made the decision to discontinue its financing of dealer inventories in New Jersey and New York as part of a regular review of the bank's strategic focus.

"This is a very small piece of our business," Thorpe said. The arrangements were part of North Fork Bank, which Capital One purchased in December 2006.

The decision forced Bigelow Motors, a Chrysler Jeep dealer in Belleville, to close its doors after 66 years in business. "It is just unfortunate," said founder Joseph Pfeffer, 92.

After Capital One informed Pfeffer's dealership that it was discontinuing financing, the dealership called other banks. "All of them said, "Thank you, but we're not in the position at this point to take on any business and the answer is no," " Pfeffer said.

Pfeffer said he is not bitter. "I went through the Korean War, the Vietnamese War, the gas shortages in the 1970s," Pfeffer said. "You could still get credit, albeit at a higher price, but (credit) is just not available at this point. You just can't get it."

The credit crisis has made its way down the food chain, said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. "It is dog eats cat, cat eats mouse," he said.

When banks have difficulty getting access to capital, customers such as dealerships also have trouble, he said.

Appleton said he has heard from some dealers who have been told their traditional source for funding was no longer interested in providing financing.

"It is game-changing for any business owner who finds out that their traditional and relied-upon sources for financing has dried up or are no longer available them," Appleton said.

But Appleton said there are still sources of financing for dealers.

Other banks are trying to fill the void, Sandler agreed. "Their terms are not going to be as generous as it used to be a year ago."

Wayne-based Valley National Bank continues to finance dealers and is interested in granting new credit lines, said Albert Engel, the executive vice president in charge of the bank's retail lending division.

"Our phone is ringing off the hook," Engel said. Some car dealers saw plans canceled or had terms changed, so they are looking for new lenders, he said.

"We are comfortable with the product and we continue to entertain new requests and grant new floor plan lines," Engel said. The bank only lends to new-car dealers. "We have traditionally been extremely cautious as to whom we will finance, whether it be for a consumer loan or it is a commercial loan," the banker said.

Meanwhile, dealers say they are able to meet consumers needs for car loans. Larson Ford Inc. in Lakewood said the company's financial institutions are strong and the dealership is able to finance customers.

Jack Straub, president of Straub Lincoln Mercury Inc. in Keyport, said his dealership does its financing through Ford Credit. "From our perspective just from being a dealer, our floor plan is solid with Ford Credit. We've been a dealer for over 30 years," he said. "Also our financing of customers through Ford Credit is very solid."

Berlin, the Asbury Park car dealer, grew up in the car business, working at his father's used-car dealership.

After he graduated from Rowan University, Berlin went to work on Wall Street as a financial adviser at UBS and Morgan Stanley in the midst of the Internet boom. He worked in Manhattan for six years until the tech bubble burst.

"After that, the markets just started getting worse and it just wasn't fun anymore," Berlin said.

He decided to go back to the car business.

"After doing something I didn't like for six years, I figured let me do something I do like," Berlin said. "I like nice cars and I think I can provide a nice service to middle-of-the-road kind of buyers."

He also could navigate the Internet and use it to build a business. "There is a real advantage if you knew how to navigate around that stuff, and I did."

He opened his dealership on Route 33 in Tinton Falls and moved to Asbury Park about 18 months ago, renovating a Kia dealership on Asbury Avenue. He built his company into one with $23 million in sales last year.

His $2.75 million credit line filled his lot with cars. "The bank is calling the line at a time when it is impossible to find another lender to floor plan."

He has talked to several banks and some have said they are not offering financing for dealer inventories.

"No one is lending to anyone," he said. "Banks aren't lending to banks and banks certainly aren't lending to used-car dealers."

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