The past two years have seen auto retailers adapt to limited vehicle inventory and pandemic restrictions while driving profits to new heights. 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. The Right Time For A Risk Management Reset By Brandon Artigue, Director, Financial Risk Management, Truist Securities
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