CID = ACV + reconditioning + warranty cost (optional) + tax and fees – down payment

Why is this number so important? First, it is your exposure! It is the amount you stand to lose if this customer is a first pay default. What is your comfort level?

Next, you must plan your cash needed accordingly when you start your operation. For example, if you decide you will have a maximum CID of $4000 and want to sell 20 cars a month, you know you need $80,000. It takes about 18 months before your operation will start to fund itself so it is recommended you have at least this many months in cash on hand to start.

CID $4000 x sales 20 x months 18 = 1,440,000 cash needed in this scenario

The same things if you want to back into a budget. Let’s say you have $1 million in cash to start and you decide you are comfortable with a CID of $3000. Accepting the fact that you will need 18 months of cash on hand to start, this means you can sell 18.5 cars per month to stay on budget.

Cash for start up $1,000,000 / CID $3000 / months 18 = 18.5 cars sold per month to stay on budget

CID is fundament to your underwriting procedures. Many dealers in BHPH don’t require down payment and do very well but the need for cash down is often dictated by your CID. If you’re total AVC plus taxes and fees totals more than your maximum CID, then require your customer to put the difference down out of their pocket.

ACV + tax and fees – ($) cash down required = max CID

Don’t get emotional about a sale in BHPH. Once you determine your CID, stick to it. Work with customers if they don’t have the cash but don’t waiver from your CID. This is the quickest way to get your business in trouble in BHPH. Create a lay away plan if people say they can have the rest of the cash in a week or so but don’t contract them. Park the car out back and give them seven days to come up with the remainder.

Stick to your guns and BHPH will add greatly to your bottom line! Can you think of any other uses for CID?

Well, there are several approaches that work well. One is to get their attention during the filing process itself. This can be done several ways.

Signing up with a tax preparation service like TaxMax is a great way to have control of the funds. A.J. Ager, Finance Director from Al Serra Chevrolet in Colorado Springs, agrees. “We are signing up with TaxMax and have used them the last several years with a lot of success. We have control over the customer’s refund and that obviously means we have control over their purchase. All you do is enter the information into their system; they file the return and send the customer’s refund.”

One other great thing about TaxMax is they have a fourth quarter program that allows you to file a refund based off the customers last check stub. This will get the ball rolling faster for them to be able to get their money faster. TaxMax also has marketing materials that you can purchase and put on your lot letting customers know you can file their refunds and sell them a car all at the same location.

Another great tip that I have done is forming relationships with local tax preparation companies and setup referral programs. I would create brochures every year and pass them out to tax preparation companies close to the dealership so they could give them to potential customers. Then, we would spiff them when customers showed up at our store.

A.J. again agreed. I am pretty sure he got this from me at a Twenty Group several years back but he won’t admit it. “We set up referral programs with all the Jackson Hewitt, Liberty Tax Services, and HR Block locations within about 15 miles of the dealership. We pay their preparers every time a customer shows at our store regardless if they buy. If we can’t sell them, that is not their fault and we want them to keep sending us customers!”

Cindy Christensen, General Manager of Herbie’s Auto Sales in Greeley Colorado, has a marketing tip that works well for them. Herbie’s does a great job of taking care of their customer base and the majority of their sales each month come from referrals or repeat customers. “During tax season, we send emails to our database of customers letting them know we will match their down payments up to $1000,” says Cindy. “Plus, we also have flyers all over our showroom and in our service departments about this incentive so even if a customer isn’t in the market now; they can refer a friend or family member to take advantage of our Herbie’s Family Rewards program. Lastly, we make sure our BDC contacts all of our buy here pay here customers with low balances (under $2000) to invite them to take advantage of this opportunity to get a new vehicle.”

Lindsey Ford of Wheaton in the D.C. metro area has another approach to getting customer in their dealership that has been influenced by the current economic times. “We are focusing on marketing to less people but marketing to the multiple times”, says Mark Law, Finance Director. “There is a lot of mistrust with customers these days on if they can get approved so we try to reassure them by marketing to them with the same message just a couple different ways and through a couple of different mediums.”

Mr. Law continued, “We did a mail piece from our customer database and then did an email blast with the same message to the same customers. Also, we purchased an email list of customers in close proximity to our dealership and sent them four separate emails. We anticipate the multiple contacts will strengthen customers trust in us and make them are more likely to visit our dealership.”

These are all some great ideas but let me mention, marketing to your existing database should not just happen this time of year. Your database is your most precious sales asset and it should be treated that way. I truly believe a new position will be created soon in dealerships as Database managers.

Next week, we will dive into some things that you can do to make sure your inventory is ready for the tax rush. Until then, I wish you and your families a Happy Thanksgiving!!!

Repossessing a vehicle is never a good thing, but technology has certainly come a long way in helping dealers do just that. The Special Finance Coach discusses how to keep customers on time with their payments, as well as how social networking sites like Facebook can help when they’re not.

Contrary to popular belief, repossessing a customer’s vehicle should be the last resort when it comes to the buy-here, pay-here (BHPH) business. It’s bad for business and it’s an outdated philosophy.

Unfortunately, some dealers are ready to “hook” a customer’s vehicle if they are one day late on a payment. What a dealer needs to remember is these customers have a history of not paying on time. That means they need to be trained on how to stay current on their payments, which is what payment assurance devices are designed to do.

Another common misconception is that all devices are created equally. There are two basic types of devices: GPS devices and payment reminder devices. Both tout shut-off features, but they vary greatly in how they’re used.

Payment-reminder devices are for dealers who want to collect their money. They are also proactive tools that help dealers nurse customers along during rough times. GPS devices are for dealers who want to collect their collateral. They are reactive tools that allow dealers to quickly make repossession decisions.

Both products serve a fantastic purpose and can be great assets to any BHPH dealer. Deciding on which works best depends on that dealer’s business plan. “Dealers have different ways of managing their portfolios and we have products to assist them with any business model,” said Jake Frank, co-founder of PassTimeUSA. “In fact, our Elite product is unique to the industry in that it combines both the GPS and payment reminder technology.”

Payment assurance devices go a long way in eliminating “skip hazards,” but skips are going to be something every BHPH dealer has to deal with. Repos will happen to any portfolio, but at least you have your collateral to remarket or sell off at the auction to minimize your loss.

On a skip, you will have to write off the entire amount of the outstanding contract. If you are new to BHPH, one of your fundamental underwriting guidelines must be to eliminate possible skips. That means you need to be wary of customers with credit bureaus that list addresses from several different states.

One precautionary measure I always recommend to my dealers is to Map- Quest the customer’s address. If it’s an invalid address, this is the easiest way to catch it. That’s not to say I haven’t been fooled before, but most of those instances occurred before technology was available.

Cybertracking Revolutionizes Collections

I once had a customer’s phone bill with his address on it, which I thought was golden. I went to his house to collect payment on a bounced down-payment check, but the address did not exist.What a horrible experience that was. Turns out the customer went around writing hot checks after opening anaccount with $50.

Regardless of how diligent you are, this situation will still happen every once in awhile. Some customers will just try to get one over on the system whenever possible. I refer to these people as “credit criminals.” They will clean up their credit reports and lie right to your face just to be able to get into a car.

One time, I had a customer run on me when I was heading up a BHPH department in Louisiana about 15 years ago. It took a couple of months, but we finally tracked down the customer and repossessed the car in Trout Run, Penn.

Professional recovery companies specialize in “hunting” down your runaway customers, and the most common practice being used today by recovery companies is a process referred to as cybertracking. Cybertracking does not replace fundamental collections practices, such as calling references, but it is a powerful tool for when a credit criminal tries to run.

Ron Brown, president of Confidential Security Investigations (CSI Group), is a self proclaimed hunter. His company has been a leader in cybertracking. “In all the years that I have been in this business, one thing has held true throughout: Man’s ability to skip trace has always paralleled their ability to communicate,” he said. “Early on, hunters would track people on foot. Then, as years went on, they started to track people by the paper trails they left behind. Now, we follow their electronic trails.”

Collectors Employ Social-Networking Sites

There are several companies out there that are in the business of gathering data. Much of their efforts are fueled by their ability to track an individual’s interactions and conversations online. Some of these sources are pay-as-you-go sites that provide access to public records, such as MasterFiles.com. There are also sites that allow free access, such as brbpub.com or Black- BookOnline.info.

“The key is being able to decipher the data,” said Brown. “Some data can be very misleading. Have you ever pulled your credit bureau and saw a job you never worked at or a residence you never lived in? We are trained to see the difference between the real and fictional data.”

Social-networking Websites are also great tracking tools, said Brown. “People update their Twitter, Facebook, and MySpace accounts several times per day, allowing anyone following their actions the ability to know just where they are and what they are doing,” he noted.

Imagine a skip feeling like he or she got away with the car without paying for it, and then heads out to lunch one day and Tweets: “Off to lunch at my favorite Italian restaurant, Tony’s.” And just as soon as he hits send, the CSI Group intercepts the updated message and sends a local field agent to Tony’s restaurant to look for their collateral.

Technology is assisting many BHPH dealers across the country to increase their profitability and minimize their losses. These products require a small upfront investment for a huge long term profit.

Like any aspect of a well-run business, good management and the right tools are two keys to success. Let’s keep that in mind as we take a look at some of the resources that are available to dealers who want to manage their loan portfolio and, at some point, move that portfolio over to a third party for a quick cash injection.

Count your losses

Randy Oler is in charge of Gold Key, the dedicated BHPH operation at Dahl Ford in Davenport, Iowa. For Oler, the first key to success is determining which customers are most likely to make their payments.

“You have to make the right decisions as to who you put in cars, and you have to be able to collect your accounts,” he says. “Many dealers allow their emotions to get involved in underwriting decisions. That will get you in trouble every time. We verify everything on the credit application to make sure the customer is telling the truth.”

As the lenders who serve the special finance market figured out a long time ago, there’s no sense in building a portfolio if you can’t collect on it. That’s why those firms place so much emphasis on verifying every piece of information on the app. OK, we want to lend money to customers who are truthful, but honesty and timely payments aren’t necessarily related. So wouldn’t some kind of probability-of-payment model come in handy?

That very notion inspired Richard Vanderport, managing partner of Chesterfield, Mich.-based Lender to Lender Financing LLC, to develop software that would give dealers a likelihood of repayment for each customer. I got to see it in action at this year’s NADA conference.

“Over the past several years, we’ve taken thousands of completed contracts and broken them down into 110 fields to give over 12,000 different combinations of probability of repayment from the customer. We believe that should be the starting point,” Vanderport said. “As a dealer, if you have factual information [for] the chances of repayment, you will know how much funding is needed and you can set a reserve aside for bad debt.”

Pay attention to that last statement — there will be losses! In my experience, you can count on missed payments in the neighborhood of 25 percent. For that reason alone, it’s best to put at least that much aside for reserve. Another way to ensure you’re adding up all your figures correctly is to seek advice from your fellow dealers.

“Joining one of Leedom and Associates’ BHPH Twenty Groups was one of the important things we did for our profitability,” Oler says. “We were averaging $1,600 per car sold before we joined our group. We have now raised our average to $4,200. You don’t want to be the guy with the lowest numbers in the room, but our group was very supportive in helping us reach the benchmark numbers we’re at now.”

So did Gold Key’s losses go up along with their gross profits?

“No,” Oler says, “because our fellow group members helped us get better at collections as well, and we realized that the price a customer pays for the car does not affect their willingness to pay.”

Portfolio review

That leads us to another objective for many dealers who enter the BHPH arena: Build up a portfolio that’s solid enough to attract attention from third-party service providers.

We’re all well aware that Triad Financial, once a leading special finance lender, is no longer buying contracts. What you may not realize is that Triad is still very much in business. It’s now focused on portfolio management and working with dealers, dealer groups, other lenders and even credit unions to collect every cent its clients are owed.

“Companies like Triad have already established the large-scale infrastructure needed to service loans cost-effectively,” says Scott France, the North Richland Hills, Texas-based firm’s vice president of portfolio management. “It would take many years — and a huge budget — to set up the same technology and systems from scratch. Even more importantly, servicers that specialize in vehicle loans often have decades of industry expertise. Dealers can leverage that knowledge to achieve the best results possible for their portfolio.”

Of course, regardless of whether you plan to move your portfolio, the same standards apply.

“The dealership may choose to set credit criteria and approve the deal themselves, or outsource this process to a third party that has data-driven models used for loan originations,” France says. “Either way, the loan agreement, bill of sale and title work must be compliant with state requirements for the loan to be valid. The vehicle sale price and loan down payment dictate how soon the loan will be profitable.”

One finance company that has continued to fund customers with derogatory credit is Los Angeles-based Westlake Financial. Recently I learned that the firm also has a program for novice BHPH dealers who don’t necessarily have the kind of capital it takes to start an in-house operation.

“Westlake’s ProfitBuilder program is the perfect way for dealerships to start out in the BHPH business,” says Mark Vazquez, the company’s vice president of sales. “Dealers get the best of both worlds: the flexibility to finance difficult-to-place customers, while at the same time, leaving the task of servicing the loan to us … all while receiving monthly payments from the portfolio.”

In a nutshell, Westlake will front the cash for the metal and allow the dealer to keep the down payment. They also handle the collections, allowing ProfitBuilder dealers to save some of the expense of a full, in-house collections department. However you choose to approach it, BHPH can be extremely profitable, and there’s no better time than now to get in the game. Make a strong business plan and don’t deviate from it. Make good underwriting decisions, collect your paper, and get help where and when you need it.

Rob Hagen is the founder of SpecialFinanceCoach.com, a Houston-based consulting firm specializing in department setup and growth.

Buy-Here-Pay-Here Business Plan

RAISE THE FLAG: As new-vehicle sales continue to slump, many franchise dealers are considering adding a buy-here, pay-here operation for the first time.

As financing for credit-challenged customers gets harder to find, more new-car dealers are turning to in-house financing to get the deal done.

Albert Einstein once said, “The definition of insanity is doing the same thing over and over again and expecting different results.” In 2008, many subprime lenders tightened their guidelines or closed up shop, leaving dealers to find new ways to finance their special finance customers or face the same fate. Taking their cue from Einstein, many franchise dealers are rethinking how they do things as new-vehicle sales continue to shrink.For years, buy-here, pay-here has been perceived as a good way to sell used cars, but not for big franchise stores. Those days are changing, and dealers are watching too many customers who would have been approved for an indirect loan a year ago walk out the door. In response, many new-car dealers are considering adding a BHPH operation to improve their used-car sales.

This trend comes as no surprise to Ken Shilson, president of the National Alliance of Buy Here, Pay Here Dealers (NABD). He believes restricted credit markets have created a perfect opportunity for dealers of every stripe to offer their own financing.

“There has never been a better time for franchise dealers to increase their profitability with buy-here, pay-here,” Shilson says. “Dealers are telling me, ‘We’ve got to squeeze out every penny. We need to find new profit centers.’ Well, with the right vehicles, processes and training, BHPH can turn your wholesale loss into a profit.”

Getting started

It’s an exciting prospect, but you don’t want to jump into buy-here, pay-here blind. As big a potential profit source as it is, BHPH can put you out of business fast. Do your homework in advance to ensure success.

“Many franchise dealers are not comfortable with the idea, and the truth is, it’s a whole new business,” Shilson says. “If you’re going into it with no experience, go to NABD first. Put yourself through some training sessions and get comfortable. Just know that you’ve got to understand BHPH well enough to manage it and supervise it properly.”

Laredo-based Sames Auto Group opened Texas’ first Ford dealership in 1910. Sames has grown in leaps and bounds over the years, and the group now includes Mazda and Honda stores as well. Hank Sames, the fourth generation of the Sames family to lead the organization, says BHPH has already kept them in business through some lean times.

“We started doing buy-here, pay-here in 1991,” Sames says. “We started small and we’ve built it up every year. It’s been a great complement to our traditional sales. We’ll do 150-plus BHPH deals this month.”

Considering most dealers average between $3,500 to $4,500 gross profit on each BHPH deal, I often wonder why more new-car dealers aren’t in the BHPH business. According to Sames, those who don’t prepare properly are quickly scared off.

“Too many dealers will stick their toes in the water, get burned and quit,” he says. “You’ve got to be either in or out. It’s a real business, just like any other. Go to a training class. There are laws to learn, tax issues … but it’s nothing that can’t be done.”

Another dealer who has reaped the benefits of the BHPH business for years is Dahl Ford in Davenport, Iowa. Fifth-generation principal K.V. Dahl offers in-house financing from two locations on opposite sides of town.

“Our BHPH business is very profitable for us, but we manage it very thoroughly,” Dahl says. “We only want to do about 20 deals a month at each location. That is what we are staffed to handle. That is where a lot of dealers get in trouble. It is easy to lend the money, but it doesn’t mean a thing if you can’t collect it.”

So, you might ask, why not add more staff to increase the sales?

“We feel like 20 deals per is a good number in our community,” Dahl says. “One thing we look at very hard in our underwriting is the residence stability. We started our BHPH operation to provide a service for customers who were unable to receive normal bank financing. Everything we do is designed to emphasize our ‘Dahl Difference’ image. At our Ford store, we have extremely high CSI scores, but we strive to make sure to take care of our BHPH customers just as well.”

Jumping in

Now that you have decided to get into the buy-here, pay-here business, what’s next?

Start by visiting NABD at www.bhphinfo.com. The association is a tremendous resource and a great place to start gathering information and look for educational opportunities. In any case, your first step must be to create a comprehensive business plan and stick to it.

The most fundamental part of any BHPH business plan is the underwriting guidelines and, in particular, the cash-in-deal commitment. Once you decide how much of your cash you’re willing to invest in each customer, you can start to figure out how much cash you’ll need in reserve to keep it going.

The phrase “cash is king” has never been more true than when it is applied to the BHPH business. The reason your business plan is so important is that it will force you to budget your portfolio. Let’s take a closer look at the cash flow scenario:

Joe Dealer decides on a cash-in-deal of $3,500 and wants to write 20 deals per month with a monthly payment of $300. After six months, Joe will have put $420,000 in cash on the streets ($3,500 cash-in-deal x 20/month x 6 months). Even if every account pays on time (remember, this is a fictitious example), Joe will have collected only $90,000 in payments. He can sell every one of his cars at a $10,000 profit, but if he doesn’t have adequate cash flow, he’ll sell himself right out of business. Cash is king!

Ideally, you want 18 months’ worth of cash to get started. Again, that’s why following your business plan is so important: If you start making exceptions and going over $3,500 cash-in-deal, you will become cash-strapped before you know it.

Collections and Inventory

Another quick way to run out of cash is to fail to collect on your portfolio. I once worked with a branch manager at a national subprime lender who said that special finance is “not a lending business; it’s a collections business.” Generally, you’ll want to have one collector on staff for every 200 accounts in your portfolio.

Your collectors have to be trained to have the same skills as counselors: not intimidating, but helpful. You want your customers to feel comfortable enough to call you if for some reason they are going to be late on their payment. You don’t want to threaten to repossess the car if they have a legitimate reason for not paying. This will only damage the trust your customers have in you.

When it comes to inventory, remember that many franchise stores already wholesale perfect BHPH units every day. When you finance those vehicles in-house, the amount you own them for is not important in relation to book value. There’s no bank to tighten down the advance you can get. So if you need to put a little more in a trade to make a new-car deal, you don’t have to worry about getting out of it at the auction. You will find a very appreciative BHPH customer for that new-car trade-in.

Next month, I’m going to talk about some of the resources available to dealers to help them get started in the buy-here, pay-here business. With special finance companies struggling, now is the perfect time to capture more business and build your customer base with a whole new profit center.

And as Shilson puts it, “If you can offer your own financing, the customer who doesn’t qualify today can start with BHPH, then maybe qualify for a new-car purchase down the road.”

Isn’t that what all franchise dealers want to hear?

Rob Hagen is the founder of SpecialFinanceCoach.com, a Houston-based consulting firm specializing in department setup and growth. Contact Rob Here

In my training sessions, I stress developing a sales process specific to special finance and sticking to it. This includes completing the qualifying stage up front. When a customer walks in and says “I have a few issues with my credit,” my response is always the same: “Great! Let me get some information from you so I can give you some options for financing.” At this point, I’ll have two pieces of paper on my desk: A credit application and my needs analysis checklist. My goal is to find the unit that fits the customer’s needs and comes as close to their wants as possible.

For instance, let’s say a loyal Ford driver walks in and you’ve got an Expedition, an Explorer and a Taurus on the lot. The customer wants the Expedition but you know she can’t afford it. You stand to make the most out of the deal by selling her the Taurus, but, for $500 less in gross, you could put her in the Explorer. To me, it’s a no-brainer. For $500, you can get that customer a heck of a lot closer to the vehicle she wanted. That creates a happier customer, more referrals and, if she pays her note, a stronger relationship with the lender.

With that said, let’s take a look at the needs analysis checklist I’ve developed along with a brief explanation of why each group of questions is important.

1. Are you a full-time or part-time employee?

2. Are you a W-2 or a 1099-MISC employee?

3. What was your date of hire for your current job?

4. Do you have any job gaps in the past three years?

Let’s find out up front if the customer is self-employed or part-time. There is no point to working on a deal for three hours only to find out at the end that the customer’s employment status will limit his financing options.

5. What is your total monthly income?

6. What is your total household income?

If a customer’s monthly income is $2,500 but his household income is $4,500, you can reasonably assume that there may be a relative or friend available to boost the income, improve the customer’s credit picture or add a second vehicle. It’s a subtle way to ask for a co-signer without offending your customer.

7. Do you have any garnishments on your check stub?

8. If so, how much comes out each month?

It took me getting bitten in the butt a couple of times to add these questions. Wage garnishments can be sizable and you need to know about them up front.

9. Have you ever filed for bankruptcy?

10. If so, was it discharged?

11. Have you ever had a vehicle repossessed?

12. If so, by whom?

This is another great example of how a special finance manager often has to wear a counselor’s hat to get deals done. Let your customers know you accept the fact that there may be derogatory issues in their past. But to go into the trenches with the banks, you need the right ammunition.

13. Do you have a trade-in?

14. If so, do you owe money on it?

15. How much of a down payment can you afford?

Now we’re getting to the nuts and bolts. The customer’s equity — or lack thereof — on the trade-in is almost as important as the down payment. More importantly, a big positive in either column can make a bad deal look good. Many managers who pull a bureau with three repos will politely ask the customer to leave the premises. But if they had conducted a needs analysis that revealed $5,000 worth of down payment or trade, they might think twice.

16. Is this vehicle primarily for family or business?

17. Do you want a car, van, truck or SUV?

Find out what your customer has in mind without getting too specific. I once worked with a dealer who was using a needs analysis checklist that included questions about sunroofs and leather interiors. I crumbled it up and threw it away. Unless you’re determined to create objections for the customer to throw back at you later in the process, questions like that are useless.

18. What kind of payment can you afford?

I consider this last question to be optional. It’s easier in some regions than others to “bump” customers up to a higher payment. In such cases, I’ve seen managers get too wrapped up in the scheduled payment amount and wind up leaving money on the table or missing deals. In other regions, customers are simply harder to bump. In colder states, for instance, seasonal expenses such as heating bills don’t show up on a credit report. In those cases, previous car payments are a better benchmark.

If you conduct this analysis on every deal, you and your customers will be heading in the right direction from the outset. Where a customer’s needs meet his or her wants, lasting relationships are formed — and referrals are sure to follow.

Rob Hagen is the founder of Special FinanceCoach.com, a Houston-based consulting firm specializing in department setup and growth.

May 28, 2009

HOUSTON — SpecialFinanceCoach.com founder and trainer Rob Hagen has launched Coach’s Talk, a weekly, one-hour, call-in radio show. Offered via Blog Talk Radio, dealers can listen live via the Internet each Thursday at 1 p.m. ET or download archived episodes.

“In this economy, dealers have had to reduce their training budgets to try to keep profits in line,” Hagen told Special Finance. “We understand the tough decisions dealers have had to make but we also understand that dealers are still hungry to learn and remain students of their business.”

The program is focused on the benefits and challenges of subprime auto finance and buy-here, pay-here. According to Hagen, a 17-year auto retail veteran, these segments can no longer be ignored by any dealer.

“For years, special finance has been optional for a lot of dealers,” he said. “But after the current recession subsides, we are going to see increasing numbers of customers who had 700 Beacon scores a year ago walking in and looking for financing. This new breed of special finance customers is going to be stressed over their current credit situation. We’re going to talk about how dealers can build relationships with those customers and the lenders who finance them.”

Last week, Hagen was in Philadelphia, where he conducted the first-ever dealer training seminar for the Special Finance Institute, a joint venture presented by Special Finance, SpecialFinanceCoach.com and PassTime USA.

I recently had a very successful bhph client of mine have the bank that had their credit line seized by the FDIC. It had nothing to do with them because their track record is impeccable; however, it serves as a reminder of what can happen to a bhph dealer that runs out of money.

Every dealer I speak with that is considering getting into bhph I tell the same thing. Create an ironclad business plan and then stick to it.  The business plan must address the crucial processes and procedures with underwriting, collections, CID (cash in deal), volume, exceptions, verifications, and staffing. Volume and CID dictate the amount of capitol on hand needed. To get started, you need at least 18 months of cash and then you need to hold true to your business plan.

I have a client that maxes their CID at $3750 and does 40 a month and that is it. When they hit 20 deals, they are basically done for the month but this store nets almost as much as their Ford dealership that has a huge service absorption and sells 120 to 140 per month.

I have clients averaging $5000 per deal with monthly losses below 2% which translates into huge profits but if the cash runs out, they are out of business.

Bk’s have always been a part of any special finance department. Going after these customers before they are discharged will give you a big heads start on your competition. You need to have a combination of lenders and marketing to make this work but I have done with success and averaged over $5500 per deal since I did not have to worry about negative equity. In conversations with several lenders, they all agree that this will be one of the first areas to rebound in special finance.

During my upcoming seminar in Philadelphia, we will spend a significant amount of time talking about lender programs and marketing specifically geared towards capturing bk business.

Count your losses

Randy Oler is in charge of Gold Key, the dedicated BHPH operation at Dahl Ford in Davenport, Iowa. For Oler, the first key to success is determining which customers are most likely to make their payments.

“You have to make the right decisions as to who you put in cars, and you have to be able to collect your accounts,” he says. “Many dealers allow their emotions to get involved in underwriting decisions. That will get you in trouble every time. We verify everything on the credit application to make sure the customer is telling the truth.”

As the lenders who serve the special finance market figured out a long time ago, there’s no sense in building a portfolio if you can’t collect on it. That’s why those firms place so much emphasis on verifying every piece of information on the app. OK, we want to lend money to customers who are truthful, but honesty and timely payments aren’t necessarily related. So wouldn’t some kind of probability-of-payment model come in handy?

That very notion inspired Richard Vanderport, managing partner of Chesterfield, Mich.-based Lender to Lender Financing LLC, to develop software that would give dealers a likelihood of repayment for each customer. I got to see it in action at this year’s NADA conference.

“Over the past several years, we’ve taken thousands of completed contracts and broken them down into 110 fields to give over 12,000 different combinations of probability of repayment from the customer. We believe that should be the starting point,” Vanderport said. “As a dealer, if you have factual information [for] the chances of repayment, you will know how much funding is needed and you can set a reserve aside for bad debt.”

Pay attention to that last statement — there will be losses! In my experience, you can count on missed payments in the neighborhood of 25 percent. For that reason alone, it’s best to put at least that much aside for reserve. Another way to ensure you’re adding up all your figures correctly is to seek advice from your fellow dealers.

“Joining one of Leedom and Associates’ BHPH Twenty Groups was one of the important things we did for our profitability,” Oler says. “We were averaging $1,600 per car sold before we joined our group. We have now raised our average to $4,200. You don’t want to be the guy with the lowest numbers in the room, but our group was very supportive in helping us reach the benchmark numbers we’re at now.”

So did Gold Key’s losses go up along with their gross profits?

“No,” Oler says, “because our fellow group members helped us get better at collections as well, and we realized that the price a customer pays for the car does not affect their willingness to pay.”

Portfolio review

That leads us to another objective for many dealers who enter the BHPH arena: Build up a portfolio that’s solid enough to attract attention from third-party service providers.

We’re all well aware that Triad Financial, once a leading special finance lender, is no longer buying contracts. What you may not realize is that Triad is still very much in business. It’s now focused on portfolio management and working with dealers, dealer groups, other lenders and even credit unions to collect every cent its clients are owed.

“Companies like Triad have already established the large-scale infrastructure needed to service loans cost-effectively,” says Scott France, the North Richland Hills, Texas-based firm’s vice president of portfolio management. “It would take many years — and a huge budget — to set up the same technology and systems from scratch. Even more importantly, servicers that specialize in vehicle loans often have decades of industry expertise. Dealers can leverage that knowledge to achieve the best results possible for their portfolio.”

Of course, regardless of whether you plan to move your portfolio, the same standards apply.

“The dealership may choose to set credit criteria and approve the deal themselves, or outsource this process to a third party that has data-driven models used for loan originations,” France says. “Either way, the loan agreement, bill of sale and title work must be compliant with state requirements for the loan to be valid. The vehicle sale price and loan down payment dictate how soon the loan will be profitable.”

One finance company that has continued to fund customers with derogatory credit is Los Angeles-based Westlake Financial. Recently I learned that the firm also has a program for novice BHPH dealers who don’t necessarily have the kind of capital it takes to start an in-house operation. “Westlake’s ProfitBuilder program is the perfect way for dealerships to start out in the BHPH business,” says Mark Vazquez, the company’s vice president of sales. “Dealers get the best of both worlds: the flexibility to finance difficult-to-place customers, while at the same time, leaving the task of servicing the loan to us … all while receiving monthly payments from the portfolio.”

In a nutshell, Westlake will front the cash for the metal and allow the dealer to keep the down payment. They also handle the collections, allowing ProfitBuilder dealers to save some of the expense of a full, in-house collections department. However you choose to approach it, BHPH can be extremely profitable, and there’s no better time than now to get in the game. Make a strong business plan and don’t deviate from it. Make good underwriting decisions, collect your paper, and get help where and when you need it.

Rob Hagen is the founder of SpecialFinanceCoach.com, a Houston-based consulting firm specializing in department setup and growth. He can be reached at rhagen@special-finance.com. ]]> http://specialfinancecoach.com/blog1/2009/04/07/managing-your-in-house-portfolio/feed/ 0