The past two years have seen auto retailers adapt to limited vehicle inventory and pandemic restrictions. Now dealers face rising interest rates — a critical concern for an industry that relies on capital to fund operations and growth. For some, it’s time for a balance sheet review and risk management reset. Changing Conditions Dealers Must Watch The Fed (Federal Reserve) has already taken aggressive steps by raising rates to throttle persistent inflationary pressure in the U.S. In the past year, we’ve seen the Fed hike the short-term rate by 3.00% (300 basis points). But with low inventory and reduced need for floor plan loans, many dealers haven’t yet felt the full impact of rising rates. 1-month CME Term SOFR since the beginning of the pandemic As you imagine what’s next for the economy and your dealership, the impact of rising rates comes into sharper focus. For instance, if vehicle supply and demand start to realign, higher inventory levels could mean more floor plan loans on balance sheets. As you look at business assets, the recent surge in inflation strengthening real estate values could provide an additional source of funds that you can tap into if needed. Unfortunately, when it comes to expansion and new construction, inflation will cut the other way by driving up building costs and the loans needed to finance them. Sustained volatility in economic and market conditions makes planning for these possibilities and others both challenging and critical. Your risk management planning needs to focus on balance sheet moves available to you today — options that may be closed off tomorrow — to protect your dealership from economic and rate volatility and keep your cost of capital low. Actions to Get Ahead As economic and market conditions are shifting, you’ll want to ground your capital decisions in your business plans for your dealership and your personal goals as an owner. You can walk through a few steps — on your own or with your banker — to gauge the impact that rising rates will have on your business and identify actions you can take to mitigate their effect: Step 1 — Start with your goals and plans: Balance sheet risk management starts by asking, “Where will my business be in five years?” Your goals might lead you to look for funds to grow, seek ways to release capital to equity holders or lenders, or explore other restructuring moves that might accomplish a bit of both. Timing of those capital flows matters, and your options may look very different if you’re planning to exit the business versus being committed for the long haul. Step 2 — Evaluate funding flows: Look at where you need funds, where you have them, and what sources (and especially at what cost) you can tap into to find capital. What happens to your cost of capital and valuation as rates rise? Where do you have needs in the future that will likely have to be met with additional, higher-cost capital? Have you considered ways to manage cash more strategically now that effective liquidity management can yield elevated returns? Step 3 — Envision what the future looks like for your dealership: Add the dynamics that you expect will change over the coming years. When do you think floor plan inventory will return to normal levels? One year? Two years? Potentially a longer time frame? What do higher construction costs mean for your dealership? Will the economy cool before you have to undertake your next building project? What changes will the ongoing electrification of vehicles and any regulatory shifts bring to your dealership? Step 4 – Get specific about actions you should take: When you’re protecting yourself in a rising rate environment, your primary move is to raise capital earlier when rates are lower and consider financial instruments like swaps as insurance. It doesn’t make sense for all situations, but commercial real estate and blue-sky loans are often amenable to this strategy. 41 TADA.ORG
RkJQdWJsaXNoZXIy MTg3NDExNQ==