Oct. 10 (Bloomberg) -- Capital One Financial Corp., the lender that added $200 million in September to cover future losses, said it will end financing of auto dealers' inventories in New Jersey and New York later this month.

Capital One will keep financing dealers in Louisiana and Texas, where it also has banking offices, spokesman Steven Thorpe said today in an interview. The decision affects about 20 dealers and a small part of the company's total loans, he said, declining to provide more details. In addition to boosting reserves last month, the McLean, Virginia-based company raised $700 million by selling common shares.

The move will put pressure on new-car dealerships, which according to the National Automobile Dealers Association already face a rise in closures of as much as 40 percent this year. Retailers are paying higher interest rates to get cars on their lots, shrinking profit margins, said Sheldon Sandler, chief executive officer of consulting firm Bel Air Partners.

``It's a defining moment when Capital One gives up the ghost,'' said Sandler. His firm in Skillman, New Jersey, advises auto retailers. ``Banks are seeing the bottom fall out of the dealership business and they don't want to be caught sitting there owning a bunch of Chevys, instead of getting cash.''

`Captive' Financiers

Dealers that sell cars from General Motors Corp., Ford Motor Co. and Chrysler LLC are having the most difficult time receiving financing, said Sandler. JPMorgan Chase & Co. and Bank of America Corp. remain leaders in providing financing to auto dealers, he said.

As many as 600 new-vehicle retailers in the U.S. may shut down or consolidate with other dealers this year, equal to about 3 percent of the total, said Paul Taylor, an economist at NADA. That compares with 430 a year earlier.

The banks' commitment to so-called floorplan, or wholesale, lending ``has been inconsistent,'' said Brian Johnson, an analyst with Barclays Capital Inc. in Chicago. ``The pressure comes back to the captive finance companies to pick up the slack.''

Without access to floorplan financing, most dealerships would be forced out of business, said John Casesa, partner in Casesa Shapiro Group in New York.

Casesa said another sign of the struggle is that so-called captive finance companies are less willing to make floorplan loans to dealerships of different brands. Credit availability for consumers wishing to buy cars already has been cut. Many lending companies have stopped offering leasing, and yesterday Regions Financial Corp., Alabama's largest bank, told about 2,600 auto dealers that it will stop issuing loans through their businesses after Jan. 1.

Auto loans made through dealers are about $4 billion, or 4 percent, of Regions' loan portfolio, said Tim Deighton, spokesman for the Birmingham-based bank. The bank will continue to finance auto dealers' inventories, he said.

Capital One gained $2.56, or 7.7 percent, at 3:11 p.m. today in New York Stock Exchange trading. The shares have declined 24 percent today.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: October 10, 2008 17:33 EDT