Becoming an independent car dealer is a highly speculative business and not recommended for beginner car dealers. Typically, in this type of car dealership, the dealer makes a purchase of the vehicle with the expectation that they can quickly sell it for a profit. During the period of ownership, the dealer incurs what is known as carrying costs, or any costs associated with a purchase. That may include car dealership loan interest and fees as well as the opportunity cost of the money used to purchase the vehicle, and any other costs to maintain or restore the vehicle before resale.
Some vintage cars can be worth millions on the high end; typically they can sell for a few hundred thousand dollars. Understanding technical and mechanical details and having the ability to identify damaged or worn parts and accessories is critical. Many dealers are also mechanics or body work specialists; these skills can greatly reduce the costs associated with repair and restoration. Take note of any special skills you may or may not have; determine whether you can afford to pay for these services and still make a profit if you cannot perform them yourself.
Car dealers who routinely purchase and refurbish older vehicles have several financing options, depending on the nature of the projects. It is not uncommon for restoration projects to take several months in some cases. However, most dealers will strive to turnaround restoration and repairs in a matter of weeks. After all, time is money. Short-term interest rates on a car dealership loan can cut into profits, so it's important to know what type of financing is appropriate for the project duration and total holding time before resale.
Expenses Associated with Car Dealerships
Most states require you to have commercially zoned space to operate as a car dealer. Depending on the work that you do, the number of cars you will carry in inventory and the services you plan to offer at your facility will dictate your space requirements.
In many cases (in most states) dealers are required to have an office space at their place of business. It is rarely acceptable to have only an empty parcel of land or a parking lot as your place of business. The size of this office space varies from state to state and may even allow a trailer or other temporary structure.
WarehousingAndFullfillment.com found that the 2017 average rental rate for warehouse space in the US was $6.53 per spare foot. To calculate your rent, you would take the total square footage, multiply it by the price per square foot, and divide that by 12 (months).
Let's say you found a warehouse space that is 2,000 square feet, and the owner is leasing it at a rate of $5.50 per square foot. To arrive at our monthly rent for that space we first multiply the total (rentable) square feet (2,000) times the cost per square foot ($5.5) to arrive at total annual rent expense of $11,000. Then we divide the $11,000 by 12 (months) and arrive at a monthly rate of approximately $916.66. (Total square feet x rental rate) / 12 = monthly rental expense.
You may wish to consult an insurance broker and your attorney when considering your insurance coverage. Naturally, you'll want to insure your inventory with a property and casualty policy to cover the perils of fire, theft, or damage. In addition, you'll need to consider liability coverage, especially if you will be conducting test drives. Depending on your volume, this could cost up to $5,000 per year for a small operator for a coverage limit of $500,000.
Auto Dealer Surety Bond
All states require a car dealer to be bonded. The surety bond is designed as a protection for consumers in the event that a dealer defaults or there is a faulty transaction. The bond acts as an insurance policy for the independent dealer's business partner as well as the dealer's customers.
Marketing and advertising expenses for franchise dealerships can cost millions of dollars each year. In medium-sized markets with a competitive landscape, be prepared to spend several hundred thousand dollars yourself.
Proven advertising mediums include radio, television, newspaper, and direct mail. Naturally, online advertising is becoming a bigger and bigger factor in effective marketing and advertising.
The good news is that syndicated research shows that car dealership advertising has a high rate of return on investment. If you know you're going to spend a lot on advertising, consider retaining the services of an advertising agency. Advertising agencies can sometimes lower youroverall media expenditures by negotiating advertising rates efficiently and getting you a better return on the creative messaging.
Like many companies, most of your overall business will come from repeat customers, so don't forget that you should allocate a significant portion of your resources to client retention.
Prepare to budget for basic utilities such as electric, heating, and internet/phones. This is usually under $400 - $500 per month.
Repairs/Restoration/Parts and Materials
Aside from the acquisition costs of the vehicles themselves, this category can be one of your biggest expenses. If you are involved directly in the restoration of the vehicles, you may want to list out any specialty equipment you will require.
And last but certainly not least, vehicle purchases are clearly the largest expense most car dealers can make.
Car Dealer Financing: Getting Started
Based on some of the expense factors discussed above, you can begin to define your car dealer financing plan. Car dealer loans and other types of business funding have become highly specialized, giving you more options than ever before.
As with other types of businesses, it is often wise to consider a hybrid car dealer financing approach. This means using some or all of the financing methods above to achieve a blended funding outcome. Making the right choices can save you thousands of dollars.