A Good Time to Grow: Target the Right Kind of Loan for Your Dealership

With the industry on track for the strongest sales year in a decade, it's "the best of times" for dealers right now. Indeed, sales are projected by analysts to top 17 million this year, surpassing the 16.94 million vehicles sold in 2005. As a result, many dealerships will be looking to expand their operations to take advantage of new growth opportunities.

However, it takes capital to grow and expand a business. Dealerships can sometimes fund growth using earnings retained from the business. But, more often, they must turn to an outside financing source for growth capital.

Bank expansion loans

The first place many dealerships look for growth financing is their bank. Commercial banks offer a wide range of loans that can help dealerships fund their growth plans, including:

Term loans. These are amortizing fixed-rate loans typically used to finance the purchase of fixed assets such as furniture, fixtures and equipment. They also are sometimes used to finance smaller reimaging projects. The loan's term should be structured to match the depreciable or useful life of the asset being purchased.

Commercial mortgage or construction loans. These are generally used to finance the construction or purchase of new or existing buildings (including a new showroom) or the purchase of commercial real estate. They also are used to finance larger, significant reimaging or remodeling projects. They're typically amortized for a period of up to 15 or 20 years.

Other financing avenues

If a bank loan doesn't look inviting or doable, here are some other financing options to explore:

SBA loans. The Small Business Administration (SBA) offers several types of loans designed for dealerships that meet the SBA's definition of a small business. For example, SBA 504 loans can be used to finance the purchase of equipment, buildings and commercial real estate. The SBA guarantees a portion of the loan, which gives banks more lending flexibility.

Manufacturer financing. Bank loans usually include strict conditions, such as minimum monthly payment amounts and covenants that require borrowers to meet certain performance levels and that restrict their business activities. Banks also typically require borrowers to submit detailed financial information along with their loan request, and they might require owners to pledge personal assets as collateral — including a personal residence. Manufacturers usually don't demand any of these things.

For this reason, many dealerships consider automobile manufacturers' financing arms for loans to finance expansion. In addition to providing consumer credit, manufacturers' financing arms like Ford Credit, BMW Financial Services and Ally Corporate Finance also can provide business loans to help dealers finance their growth and expansion plans.

Another plus: Manufacturers already have a relationship with dealerships and know their financial conditions. Thus, dealerships may have to jump through fewer hoops to obtain financing than if they were trying to obtain a bank loan. On the down side, financing through the manufacturer will typically involve a higher finance charge or interest rate.

Be prepared

Regardless of whether you're seeking expansion financing from a bank, an auto manufacturer's financing arm or somewhere else, be prepared to demonstrate how you'll repay the loan. Also show the lender exactly how the loan will be used to grow your sales and revenue.

With sales strong and future prospects generally bright, now could be a good time to expand your dealership. So, take the time to plan for how you'll finance your growth initiatives.