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Taking the BHPH Plunge

August 2009, F&I and Showroom - WebXclusive

by Rob Hagen

The former coach of the Dallas Cowboys and Hall of Fame inductee Tom Landry once said, “Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan.” This notion can apply to you and the buy-here, pay-here business. When starting a BHPH department, the goal is simple: Sell a lot of cars and make a lot of money! The question then becomes, how does one do it?

The very first thing you need to do is develop a business plan. It should address initial capital needs, underwriting and collections. Since you won’t be at the mercy of an outside funding source, you can approve anyone you want. But there are several questions you to answer before you make your first approval. How much money will it cost to start a BHPH department? Who should I approve? How will I collect from the buyer?

1. Establishing Initial Capital

“Cash is king” is a very common phrase in the car business, but it is the golden rule in BHPH. That’s because this business model is one in which you can actually sell yourself out of business. If you do not have enough cash, you won’t be able to fund anymore contracts. If you start small and grow over time, it will be easier to determine your capital needs.

As part of your business plan, you need to determine your exposure, or your cash in deal (CID). This is calculated by taking your actual cash value (ACV), including reconditioning costs, state taxes and fees, and subtracting it by your customer’s down payment. For instance, if your ACV is $4,850 plus $500 in taxes, your total up-front cash required is $5,350. In your business plan, if you determine that you want your deals to have a maximum CID of $4,500, then your customers will need to put down a minimum of $850 to stay in line with your business plan.

To determine the cash needed in a month to get your BHPH funded, multiply your CID by the number of cars you plan to sell in a month. When starting a BHPH department, it is best to have at least 24 months worth of cash up front to get going.

One of my clients has a BHPH location that does 20 deals a month. And when the operation hits 20 deals a month, it’s virtually done unless someone has an extraordinary amount to put down. His CID is no more than $4,000, which means the dealership needs $80,000 per month to fund its BHPH business. And if they were starting from scratch, they would need $1.92 million to start.

2. Establishing Underwriting Policies

Underwriting is not an exact science, even though there are several software programs available to help make these decisions more scientific. But there is a method for making credit decisions that doesn’t rely on technology.

The first thing a BHPH dealer needs to do is find out if a customer can afford a new payment. A manager can conduct an in-depth credit interview to determine the customer’s remaining disposable income. Just make sure to base everything off of net income. Additionally, a lot of dealers do not factor overtime into income calculations unless a customer has a long-term job and a proven track record of receiving overtime.

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