SBA Offers Loan Guarantees To US Auto Dealers

May 30, 2009

There have been new reports issued by the Obama Administration regarding a potential move to guarantee loans for automobile dealers that have suffered serious financial setbacks due to collapse of major automakers like Chrysler and GM.

The Small Business Administration has begun talks with the Treasury Department’s auto task force in order to reach some reasonable agreement about providing extensions on loan guarantees to dealerships. These guarantees would allow dealers to buy vehicles to stock show rooms. Still, there are details of the proposal that have not been worked out like the size of the guarantees or what timeframe they will be distributed.

According to Jonathan Swain, assistance administrator of the SBA, those auto dealers that are eligible for SBA loan guarantees in some areas may not qualify for so-called “floor plan refinancing.”

This form of refinancing was used during the 1980 auto crisis as part of a directive signed by President Jimmy Carter, but has never be used since.

“Our regulations have never permitted us to do it, except for the rare exception when the president elected to do it in 1980,” Swain said.

The reasons that dealers need assistance like the loan guarantees are numerous. Certainly, the economic situation has taken its toll, making it difficult or impossible to get loans because of flagging auto sales and shriveled credit markets. Fears caused by the bankruptcy of Chrysler and the almost certain filing by General Motors have made car values drop so dealers are unable to repay current loans.

The National Automobile Dealers Association has discussed matters with Obama’s auto task force. NADA members have suggested that implementing guarantees would also help prevent closures of dealerships. If the dealers fail, the result could be the activation of “claw-back provisions.”

This means that financers could demand partial repayment of dealer inventor loans if the automaker goes into bankruptcy.