Car dealer acquisition loan

cadillac, cars, sales-6888500.jpg

Car Dealer loan help
Posted by: Russ Jun 29 2004, 06:41 AM
I hope that you can help.

I am interested in purchasing a used car dealer but I need a loan to purchase the cars and the dealer the business seels about 5 cars a month and has 40 cars in inventory.

No real estate is involved in the business I can get lease for 3 years. Price is very affordable with business valued at price of the cars. Loan needed is about $350,000 for the whole business. Location is Southern Cal.

Please help with this business loan
Posted by: The Fox Jun 29 2004, 09:29 AM
I’m sure LoanU will come out with an extensive list here, but these are my thoughts.

There’s not a lot of information for me to work with.

I’m hoping you have extensive experience in used car sales.

Do you have money to put down, or substantial accessable equity in your home or other assets?

Does the business cash flow? Good location? Employees? Complimentary services (auto repair, body work, etc)?

What is the situation with the real estate? I’m assuming the current owner is planning to lease the real estate to the prospective owner. Lease terms? Does he own the RE free and clear? Is this his retirement? [What I’m getting at is although the business may look “very affordable” because you are just buying the cars. But you are also getting a lease too – something that should not be overlooked.]

I’m sure I’ll come up with more, but that’s it for now. Best of luck – we’ll do what we can to help.
Posted by: loanuniverse Jun 29 2004, 09:55 AM

The way that auto dealers are usually financed is with a floor plan loan. These types of lending facilities are extended to finance the inventory {automobiles}. The bad news is that many banks do not like to give floor plan loans because it takes a lot of monitoring. In addition, some lenders might not like the idea of financing used automobiles, and the ones that do might not want to advance 100% of the black book value of the cars.

I think your best bet to get financing would be from the lender of the seller. I am sure that the dealer is being financed by someone unless the owner is wealthy enough to finance it out of his own pocket. This lender would already be familiar with the operation and you would probably have a better shot with it. Nevertheless, if the sales price is $350,000 and you are looking for 100% financing this would be very hard to get.

When you say ” Price is very affordable with business valued at price of the cars. Loan needed is about $350,000 for the whole business….” Do you mean that the purchase price is $350,000 and that the vehicles alone are worth that much?

Whenever someone mentions a number, the analyst in me likes to question it and the first thing that I would do is request an inventory listing showing “model / year / mileage” and run the numbers myself. You are looking for the ”wholesale value” Those forty cars need to add up to $350,000, and then you are looking at probably a maximum of 80% financing on the floor plan loan.

Is it possible to get 100% floor plan financing? Yes it is, and once you have established yourself, you might. The couple of loans I have seen are at 100%, but these loans are for seasoned auto dealers.

You should also know about curtailment. The fact that the loan advances a specific percentage on each piece of inventory {automobile} does not mean that you are going to have the money outstanding all the time. By looking at the numbers that you posted, inventory is 40 units and 5 are sold each month. This means that some cars are going to be in the lot for at least eight months. In fact, some cars might take more than a year to sell and the lender is going to want to reduce the amount outstanding on units that are getting old by curtailing the principal outstanding each month. Curtailment could be anywhere from 3% of the outstanding to 10% of the outstanding each month.

This type of financing is very complicated and requires the lender to keep close monitoring of the relationship. This means that the lender will send people to your place of business to do audits on the automobiles. It is kind of labor intensive and a lot of bankers have gotten in trouble by financing less than reputable characters. I would say that your best bet would be to talk to the seller and find out who his lender is and contact this lender. I would not expect to get 100% financing of the purchase, and your experience in the industry will be very important for the lender to determine if they want to continue financing the business. You will also have to look and see if the lender is also financing the sale of automobiles to consumers, but that is another complicated subject in itself.

Fox comments about resources available and cash flow are important as you will need both in order to pull this off.

Good luck
Author: Commercial Loan Underwriter