Credit Crunch Keeps Lid on Dealers

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JoeDelmontIf you’re waiting eagerly for 2010 to bring your business a boost, I’ve got some disappointing news for you. There isn’t going to be a big industry turnaround next year, and your friendly local lender probably isn’t going to give you as much money as it has in the past. Tight credit — in both commercial and retail segments — is going to keep the lid on spending and will continue to make it tough to run a business.

Even if lenders decide to turn on the money machine, there are indications that consumers aren’t willing to take on any more debt. That means if your prospects can’t pay cash for a new machine, they’re probably not going to buy one.

Let me be clear about this: I don’t think that the motorcycle industry is going away, and I don’t think that riders have lost their passion for the sport. I do think, however, that the salad days of fast sales and gushing credit that we’ve enjoyed for the last half-dozen years are gone for a long, long time.

Don’t look for any improvement until 2011 at the earliest, unless the creditsituation improves dramatically. The recent flashy words from Washington notwithstanding, you’re not going to see lots of eager customers next year.

The numbers might show that the national recession is receding, but I believe the real situation facing consumers — and industries like ours that sell toys and luxury products — is worse than the numbers indicate. How many people do you know who tapped their savings or their 401(k) accounts to keep their homes and maintain a semblance of their former lifestyle? I know of several.

The marketing manager of a high visibility aftermarket parts company told me recently that he’s been living on a sharply reduced paycheck for several months because revenues fell so far below forecasts. And if new equity financing can’t be arranged — something that’s far from certain — the company might shut its doors.

Another established company I talked with had its credit line slashed by 60 percent recently, and the balance was rewritten as a note payable over several years. The payments on the new loan are costing the
cash-strapped company several thousand dollars each month. As a result, its employees have taken sharp pay cuts for an indefinite period.

There’s more turbulence under those choppy waters. How many stories like these have you heard?

Credit is still tight and it’s getting tighter. A recent front-page story in The Wall Street Journal didn’t pull any punches. “Drought of Credit Hampers Recovery” reads the headline. The first paragraph tells the story: “A year after the U.S. economy was brought to its knees by the bursting of the housing bubble, credit for consumers is still being aggressively ratcheted back.”

Not only is it being cut back, but banks are charging more for what little credit they provide. Wells Fargo & Co. said it plans to hike interest rates for most of its customers by three percentage points in November this year.

Wells Fargo isn’t the only one pumping up rates, of course. The rate on one of my personal cards was bumped up six points a few months ago — that’s on a card that had a zero balance at the time, that has never had a balance higher than 40 percent of the credit limit, and on which I’ve never been late. Needless to say, that card went into the drawer where it won’t see the light of day for a long, long time.

Back to the WSJ report: Total consumer spending fell $12 billion in August, according to the Federal Reserve. It was the seventh straight month of declines, notes the Journal. “The drop is a stark demonstration of how banks and other lenders are scaling back,” it continues, “… it also reflects a reluctance by Americans to hold big loads of debt at a time when the job market remains in bad shape and the value of their homes has fallen.” Notes one consumer interviewed by the Journal: “If I don’t have credit, then I can’t use it and I won’t use it.”

SBA Program fails
If you’re looking for help from Big Brother in Washington, forget it. I checked with the Small Business Administration to see how its widely promoted flooring loan guarantee program announced this spring has been received. It hasn’t worked out very well. In July, an SBA official estimated that as many as 4,000 loans would be made under the program. The actual number isn’t even close to that. An SBA official told me in September that only nine dealer loans had been completed under the program, and none of them were for motorcycle dealers.

It’s not clear whether businesses aren’t seeking the money (some say the requirements are poorly designed) or whether banks simply aren’t lending the money. But according to the SBA official, “many lenders that have not been involved with this kind of loan and have developed neither expertise nor systems to handle them are leery of participating, and that keeps the numbers down.” (Isn’t the SBA supposed to be educating these guys?)

Here’s the bottom line: Credit is tight and it’s getting tighter, especially for consumers and small businesses. One industry observer expects $1.5 trillion of credit card lines to be pulled out of the system by the end of 2010.

So don’t look for a boost in the new year. It’s simply not going to happen.

This article originally appeared in the Dealernews November 2009 issue. 

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