Though car dealerships are quite a popular business, it comes with considerably thin profit margins and faces fierce competition due to the increasing disposable income of the urban mass and the easy availability of car loans with low-interest rates. Besides popular franchise dealerships like Honda, Toyota, Volkswagen, Ford, etc., there are multiple single-person-owned registered car dealership companies in the U.S. Independent car dealers vastly uphold the used car market sales. To thrive in today’s highly-competitive auto sales industry, car dealership owners often require business financing to cover various operational expenses and also to ensure uninterrupted growth. But, car dealership owners, many times, face difficulty in getting business loans, as quite a few lenders view car dealerships as a high financing risk considering the narrow profit margins, fast depreciating inventory, erratic growth of sales, and seasonal setbacks. However, convenient business financing options are available for both used and new car dealers.
6 Popular financing options for new and old car dealers:
Floor Plan Financing
Technically, it is like a high-limit business credit card that can be used by the borrower to purchase inventory(cars), from the manufacturers, for dealership lots or showrooms. This type of financing can be availed by both used and new car dealers. The borrowers sell the cars and repay the used amount from the line of credit along with interest.
Business Line of Credit(New and old car dealers)
Those looking for extra funds to pay for overheads, payroll, inventory, emergency expenses, or fill the momentary cash flow gaps find business lines of credit quite beneficial. It is similar to business credit cards that meet revolving cash requirements. Interest is only applied to the withdrawn amount and not the entire credit limit. However, to qualify for a business line of credit, one needs to have high credit scores and significant trade history.
Term Loan(New and old car dealers)
Term loans are beneficial for the car(old or new) dealers looking for big amounts that can be repaid over the longest possible terms. Funds from this type of financing can be used to purchase land, set up showrooms, and make other big investments. Term loans come with comparatively lower interest rates. However, like a business line of credit, this type of financing is difficult to qualify for, as term loan providers have stringent credit score requirements.
Equipment financing(New and old car dealers)
Considering the rapid technological advancements, car dealers these days need to constantly upgrade their existing equipment and integrate cutting-edge technology to gain competitive advantages. Equipment financing is specifically devised for those looking for funds to pay for equipment-related expenses. In the case of equipment financing, the eligibility requirements are comparatively less stringent and the repayment terms usually range from 1 to 5 years.
Merchant Cash Advance(MCA)
Technically, MCAs are not loans. MCA lenders offer the borrowers a lump sum in return for a percentage of their future credit card sales. The lenders keep on withdrawing the repayment amount from the borrowers’ business accounts daily, till the entire amount is repaid. As MCAs come with factor rates and not interest rates, the payback amount never changes and is calculated when the agreement is made. Car dealerships witness noticeably low sales during the slow business seasons and repaying traditional business loans with fixed monthly payments becomes extremely burdensome amidst the cash flow crunch. Therefore, many car dealers find MCAs convenient, as the daily repayment amount depends on the particular day’s income. Therefore, the repayment amount is less on low-income days and more on high-income days. Also, MCAs are ideal for loan seekers with a low credit score as MCA lenders assess the creditworthiness of the applicants based on their income, profit and loss, and bank statements of the last 6 months to 1 year. Besides, car dealers looking for quick funds can opt for MCAs. This is because MCA lenders give approvals on applications in a few hours, only if all the required documents are provided, and release funds within 24 to 48 hours of the approval.
Inventory Financing/Manufacturer financing (New car dealers)
This type of financing usually turns out to be extremely beneficial for new car dealers or franchise dealerships. Often, franchise manufacturers either extend credit to their franchisors or help them get funds from financial institutions, depending on the inventory they are looking to keep. In the case of inventory/manufacturer financing, the inventory(cars) acts as the collateral for the loans and in the case of defaults, the vehicles get seized by the lender. Therefore, this type of financing comes with low interest rates.
Business loans can be used to buy or lease space for setting up a warehouse/office/lot/showroom, market a business, purchase inventory, upgrade equipment, hire skilled and experienced staff, etc. When the borrowed funds are used strategically, business financing immensely helps car dealers to run their businesses and ensure growth. Hence, car dealers looking for additional funds must understand their business requirements, conduct thorough research on the available financing options, and select the most ideal one for their businesses, discreetly.