Four Ways to Manage Interest Rate Spikes

By Chuck Massa, Peoples Bank

Interest rates have continued to spike leaving consumers and businesses wondering, “when will we see it go the other direction?” The Federal Reserve increased the benchmark interest rate from nearly zero to where we are now- at 4.60% – over twelve months. And it’s projected that more increases are on the way.

For dealerships, it can make managing financial and operational conditions more challenging than ever. You didn’t have inventory last year, so it wasn’t as big of a deal that rates started to go up. But as you get more cars, trucks, and SUVs onto your lot, how well are you adjusting your operations as the rates continue to go up?

The four strategies to reduce spikes

It is important to learn the best strategies available to help mitigate the impact of these spikes. The best tactics revolve around four main items: working capital, expenses, inventory management, and the valuation of your dealership or your next acquisition.

Working capital

Let’s start with working capital. You’ve accumulated excess cash due to higher gross margins and net profits over the past few years. When reviewing your working capital position right now, we think your best bet is to pay down debt, make extra payments on loans, or put additional capital in your offset account. You can also preserve your cash in investment options, by opening a new money market account that can be used for future projects.

Expenses

As for expenses, record profits over the last few years have allowed dealers to evaluate their fixed operations costs and vendor contracts- and we suggest that you continue to do this as interest rates continue to rise. Recently, we had a conversation with a dealer and showed them where additional cost savings could come into play by looking at each expense category. If you trim excess expenses now, as the Fed continues to raise their rate, it will help your bottom line.

Inventory management

Your floor plan credits used to be a revenue source, but recently it has become a true expense again. That means it’s time to closely survey your inventory management. As the new car supply picks up with the OEM’s, your lot will start to fill up again. When interest rates were low, you might have not been looking closely at all inventory data, but now, you need to be on top of it.

When you consider this environment, you want to think about your sales staff as well. You may have cut back on staff when you didn’t have inventory.  With inventory stock back up, there’s more competition and your staff may make less commission due to the ability of consumers to shop around town. You need to ask yourself if you have the right pay plan and structure with these new inventory levels. Are you retaining good salespeople during this time through 401k’s, incentive compensation plans, more PTO time? As stock goes up and you make strategic inventory decisions, they might be able to sell more cars.

Valuation

The last piece we want you to consider in light of the ongoing rising interest rates is getting an accurate valuation of your dealership and getting clarity on your plans around upcoming acquisitions. Owners and investors need to have a strategic meeting with their lender prior to jumping into an acquisition. You will want to know how these new rates affect returns, cash flow models, and ultimately the valuation price that you’ll pay.

For the first time in many years, the rising interest rate environment has created a host of new scenarios and conversations for floor plan lenders to have with their existing clients and those wanting a fresh new perspective. Dealers expect rates to increase and with that, they need a higher level of service and knowledge from their floor plan lender to deliver the best options regarding their financing needs.

Are you with the right lender? Do you have the right rates? These are questions you must ask right now as you manage this changing inventory world and interest rate increases. We are here to help.