Nov. 10, 2008 – Wall Street’s influence on Main Street
By Steve Bauer
Managing Editor
The troubles wreaking havoc with the nation’s financial sector might be thousands of miles away from Paul Riley’s dealership in northern New Mexico, but the potential ramifications of Wall Street’s mighty struggles weigh heavily on his mind.
“As a small business owner it might not seem that I’d be affected by giant investment banks declaring bankruptcy or the wild swings in the stock market, but it impacts my customers and larger businesses I deal with,” he said.
With the stock markets on a historic downward roller coaster ride in October, coupled with the government’s massive bailout plan and consumer spending confidence at lows not seen since the Great Depression, powersports dealers are holding their collective breaths to see what, if any, effect the meltdown on Wall Street will have on their business.
Credit crunch looms
Congress’ unprecedented $750 billion bailout package was in large part designed to free up frozen credit markets, allowing banks to lend to one another and in turn free up more cash to lend to consumers. But according to many experts it will take months, if not longer, for that money to find its way back to the consumer level.
“The credit market is going to be tight through most of 2009 and it’s anticipated that retail sales will slow down dramatically,” said Michael Seid, managing director of Michael Seid and Associates, a domestic and international franchise and dealership consulting firm. “Loans will still be available but lenders will be looking for more secure opportunities, at likely higher equity requirements and possibly higher interest rates than they did in the past.”
Officials at GE Money, a major powersports lender, say dealers shouldn’t expect any significant changes regarding loans or credit restrictions in the near future, but would not rule out a change if global financial markets continue to worsen.
The news isn’t nearly as comforting for dealers looking to secure capital from local banks for floor plan costs, as many smaller banks are freezing larger loans until credit lending between larger financial institutions loosens in the coming months.
“In the next 12 months, there’s a real possibility of thousands of banks closing down,” said Wilbur Ross, CEO of WL Ross & Co., a financial consulting firm that focuses on small businesses.
Ross says unless the federal government follows through on its plan to buy shares in what are primarily regional banks, that number could rise even higher.
For some dealers, however, the inability to secure those loans means fewer vehicles on display and less money coming in.
“I’ve had to switch banks in the past month because the bank I had been working with for the past five years was a subsidiary of Wachovia, and it froze all its small business accounts,” said Gary Eagen, owner of Eagen Powersports outside of Lansing, Mich. “The new bank I’m working with has much tighter restrictions on loan amounts and charges a higher interest rate, which has forced me to consider cutting my store hours and my staff.”
Insurance woes
Ross says one major ripple effect that will likely hit small business owners hard is the fall of insurance giants such as AIG. He worries if more major insurance providers fall, the impact on small businesses could be fatal.
“From my perspective, a major insurance company, like AIG for example, filing for bankruptcy would have much greater significance on small businesses,” he said. “As competition dwindles, premiums will surely rise, forcing many small companies to close their doors because they can’t afford to insure their property.”
Ross says federal regulators are moving quickly to transfer AIG policies to other insurance companies, but their efforts will be in vain if other insurance companies fall in the near future as well.
“While the federal government has had to deal with this problem in the past, it has never faced the challenge of having to move policies on such a grand scale,” he said.
Unique opportunities
Even with all the uncertainties with the economy, Ross says there are some great opportunities for small businesses to use the current climate to their advantage, specifically for expansion and the recruitment of top talent.
“First off, there are going to be dealerships that are going to go out of business, and if you’re a larger business with some liquidity to work with, this is a good time to considering buying those businesses to expand your own,” he said. “Long term this will have a beneficial impact for the entire industry, as you end up with stronger dealerships better capable of handling economic hardships.”
Another result of the cutbacks and layoffs not only in the financial sector, but in the auto industry, has created a large pool of top talent and resources across a broad range of knowledge areas. Ross admits that while it might be difficult for dealerships to attract top-level F&I personnel or management, the current market conditions have prompted even the most seasoned professionals to explore new options and opportunities.
“You can capitalize on this by soliciting a need for your business, whether it be F&I, sales, management, etc., and maybe even offer that person a job on a contract basis. It doesn’t have to be permanent,” he said. “I believe any innovative new and existing small business will have the unique opportunity to take advantage of the influx of talent to the market to help drive their businesses forward in a way perhaps not as easily possible in an up market.”
A cautious approach
So what does the current market fluctuations mean to powersports dealers? According to Robert Bovarnick, managing partner of Bovarnick and Associates LLC, a Philadelphia business law firm, every business move you make should be done with long-term ramifications in mind.
“Dealers need to step carefully,” he said. “Make sure you don’t have a bank account with more than $100,000 in it. If you have more than that, open accounts at different banks to take advantage of the FDIC insurance. There’s no need to panic, but you have to be cautious. Don’t hire new staff unless absolutely necessary, keep a close eye on your customers’ spending habits and don’t take out loans unless absolutely necessary. But when it’s all said and done, you must continue with your business, ensuring that you’re prepared to survive in the short term so that you can thrive once the markets return to normal.”