Credit Not an Answer to Financial Woes

In these days of easy credit, the temptation to borrow money to ease cash flow or cover losses may be very strong. Reckless use of credit, simply put, can ruin an auto dealership.

When a dealership carries too much debt and doesn’t have the cash to pay its bills and taxes, it’s essentially out of business. Period.

What are some of the warning signs?

• Paying taxes late or not at all


• Making late or partial payments to vendors


• Losing vendor discounts because of the above item


• Having difficulty making payroll, especially paying the owner

If a dealership is experiencing one or more of the red flags above, by all means it should take the initiative and contact the appropriate parties before they find the owner.

The financial staff should determine ahead of time what the dealership could comfortably pay on a regular basis, then the owner should make the case, in person, and adhere to the agreement.

That first item above is especially onerous, for a number of reasons. While overextended credit is serious, overdue taxes can be deadly.

Even if a dealership declares bankruptcy, taxes still must be paid. And taxes are always first on the agenda for repayment in a foreclosure.

In addition, a record of back taxes owed can be very damaging to efforts to consolidate debt or to renegotiate current loans.

Lenders and creditors may not want to take a chance that the dealership will repay them if it allowed something as serious as a debt to the government to go unpaid.

The prudent dealership will have its taxes paid up before entering into these types of dealings and will keep in mind that loan rejections will adversely affect credit rating.

Owners of dealerships with a negative operating cash flow have two choices: reduce spending and/or increase prices.

In today’s competitive and global automotive marketplace, raising prices most often is simply not an option to pursue.

That leaves the need to carefully review current spending habits and cash flow requirements for possible areas that are unnecessarily inflated. Special attention should be paid to capital expenditures that don’t generate a decent return on the investment. That cash is needed instead to run the business. The dealer should take a hard look at spending, including the payroll.

While debt consolidation may be a perfectly acceptable option, the total amount of the debt should not be increased by the dealer.

The goal in renegotiating loans is to obtain lower payments over a longer period of time. Interest-only payments are typically a last-resort tactic to stop the cash-flow hemorrhaging that hardly ever works.

More than a quarter of a million small businesses have failed in the last 25 years because of a lack of cash. Prudent dealers will take precautions now rather than risk losing the business they’ve worked so hard to build and nurture.

If the situation is beyond control, help is available through the Small Business Administration, auto trade associations or private consultants.