Capitalization Sources for Auto Dealers

Literature related to the problem investigated is reviewed in this chapter. This review is presented in two major discussions. The first discussion considers the capital requirements of independent automobile dealers, while the second considers the characteristics of various sources of capital.

CAPITAL REQUIREMENTS: INDEPENDENT AUTPOMOBILE DEALERS

Capital requirements exist for independent automobile dealers in two general contexts. The first requirement area concerns working capital, while the second requirement area involves the marketing activities of these organizations. Capital requirements in these two general contexts are reviewed separately. Working capital requirements are considered first, and this discussion is followed by a review of capital sources.

Working capital consists of the shortterm financial requirements of business enterprises (Gitman, Joehnk, & Pinches, 1985). Working capital is defined as the difference between current assets and current liabilities, where the designation "current" implies maturity dates of oneyear or less (Brigham

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s limit its application to loans of $1,000 or less. California restricts interest rates to a declining scale (2.5 percent to onepercent) on loans of $2,500 and under, with any agreed rate permitted on higher loans. Arkansas restricts interest rates on any type of loan to fivepercent in excess of the prevailing Federal Reserve discount rate, a restriction which severely limits consumer finance activities in that state. Chattelmortgage loans place an independent automobile dealer in competition with the consumer loan operations of commercial banks and credit unions, as well as those of some thrift institutions, the financial subsidiaries of automobile manufacturersGMAC (General Motors Credit Corporation), and Ford Motor Credit are two examples, and other major consumer finance companies. To avoid such competition by not offering such financing services to purchasers, however, places the independent automobile dealer at a serious disadvantage with respect to automobile dealers which are affiliated with automobile manufacturers through franchising contracts.12 CHARACTERISTICS OF CAPITAL SOURCES Cost of capital refers to the cost to the corporation of investment capital (Bolten, & Conn, 1981). The cost for borrowed money
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Approximate Word count = 6148
Approximate Pages = 25 (250 words per page)