The Five Questions of DCG Capital: Question Three

Do you operate your dealership on a cash basis?

The answer is almost certainly not.

“There is virtually no business in existence today that can truly operate on a cash basis unless you are operating an ice cream truck,” said DCG Capital Executive Manager Leonard Seawell. “Therefore every dealership has an existing relationship with one or more banks.”

The truth is, most auto dealerships are funded with a mix of both cash and credit, using a variety of liquidity sources, such as floorplan financing, pending future receivables, and bank lines of credit. “No bank has a vault of cash,” added Seawell. “Every dealer works with a bank.”

In the constantly changing banking environment, funding a dealership acquisition, as well as maintaining existing credit relationships is as competitive as ever, Seawell noted.

“It is in the dealer’s best interest to have that relationship reviewed and analyzed to look for the opportunity for improvement, whether or not you are pursuing the purchase of an additional dealership.”

Banks can and do adjust their lending standards for various businesses, increasing and decreasing exposure to dealerships based on size and product focus. “No dealership should have to keep track of all of that,” said Seawell. “Running a dealership is hard enough.”

Banks frequently change lending strategies based on dealership size and market segment. Small dealerships in certain areas with a more specialized customer base can see their liquidity access change seemingly on a whim. “They may no longer meet the bank’s lending requirement,” noted Seawell. “The bank can just change their mind.”

“In most cases, a dealership works with many financial institutions,” said Seawell. “Both captive finance arms and commercial banking institutions. They need a deposit account.”

Additionally, loan structures to fund dealership acquisitions can vary by lending institution. Everything from the interest rate, loan term and amortization schedule to the various covenants tied to a dealership’s financial statement may differ by lender.

“The dealer’s financial statement is an unyielding document from a compliance standpoint that may be, and often is, audited by both bank lenders and a dealer’s captive finance arm,” added Seawell.

That improvement could be in cash management policies and procedures, floorplan financing, or working capital lines of credit. The result could be a meaningful improvement in cash flow.

“We identify banks that can offer better financing at favorable terms for the client,” said Seawell. “Competition between lenders may be aggressive.”

Using a network of no fewer than 20 capital sources, DCG Capital seeks competitive bids for proposed acquisitions with a “commitment to ensure funding is in place within fifteen days before [an acquisition] closing.”