Bailout Watch 565: Small Business Adminstration Dealer Bailout Grows

Car dealers are some of the most politically connected people in America. As we reported yesterday, more than a few axed GM store owners demonstrated their political muscles by forcing the nationalized automaker to rescind their franchise terminations. Further back in time, we highlighted the Obama administration’s “stealth” dealer bailout: a car dealer-specific Small Business Administration (SBA) loan program. Under the program, the SBA guarantees 75 percent of a car dealer’s floor-plan line of credit, ranging from $500,000 to $2 million. The SBA’s network of private-sector lenders make the loans. In theory. In practice, it’s been what the Brits call a damp squib. Although Automotive News [AN, sub] fails to put any hard numbers to the program’s failure, they acknowledge that the SBA dealer deal “has had trouble attracting lender participation since its May launch.” Needless to say, the “answer” to the SBA lenders’ entirely understandable reticence/prudence is . . . bigger loans and more federal backing.

The House measure [passed yesterday by a 389-32 vote] would provide federal guarantees of as much as 90 percent on these loans through the end of September 2010 . . . The administration wants loan limits of $5 million and permanent federal guarantees of 90 percent.

To be fair, the higher limit will make the program much more attractive to cash-strapped dealers. Only 30 percent of American auto dealers have vehicle inventories worth less than $2 million, the current maximum line of credit available through the SBA.

Then again, let’s revisit the reason for the [relatively] low loan limit and the limited federal guarantee [via The Charlotte Business Journal].

[Associate administrator for the Office of Capital Access Eric] Zarnikow says the SBA decided to offer a lower guarantee on floor-plan loans because the agency has never made those types of loans before and didn’t want to take “undue risks” on a new, pilot program.

Also, to be honest, why are the feds “investing” in car dealers anyway? And what’s the cost of this program? I mean financially, not politically.