Choosing the Right Special Finance Company

Questions that come to me quite often are, “How do I choose lenders, and how do I get them to sign up my dealership?” Some readers will see these questions and wonder what the problem is. Those readers probably will be running the special finance department of a relatively large, city-based franchise dealership with, quite possibly, more than one auto brand that the department is responsible for. And, the banks and finance companies usually do seek out dealerships such as these because of the perception that there will be plenty of business and the finance company will get its fair share. However, not all dealerships fit that description and may have to seek out finance sources for their special finance business.

Most banks and finance companies have a preferred borrower profile that they’re more likely to purchase. So, if your dealership is seeing, or wishes to see, primarily nonprime borrowers, that is, customers with credit bureau scores of around 620 and up, that will mean your finance resources would not be the same as if your dealership were seeing scores of 520 and below. The underwriting is different, the documentation requirements are different and you need to be aware of what will serve you best. There are finance companies available for the full spectrum of credit, but some matching is required to ensure that your customer base and inventory will fit the finance company’s requirements.

Some finance sources are almost more focused on “efficiency” than they are on volume. That is, they are very interested in the look-to-book ratio for your dealership — the ratio of contracts purchased divided by applications received. Typically, if the look-to-book is less than 10 percent, the finance source will be speaking with you about improving that ratio and screening applications more carefully prior to sending them to the bank/finance company for credit decisioning. Failure to meet the bank/finance company’s efficiency expectations usually results in the dealership getting cut off. For example, if a finance source states in its guidelines that it will not approve applicants with credit scores below 550, then you should plan accordingly and not send them an applicant with a 480 score. While that seems like common sense, you might be surprised at how often purchasing guidelines are ignored, either through ignorance or boundless optimism on the part of the special finance manager.

However, there are other lenders who are not concerned about efficiency measures and want to see all your applications. Others wish to see all applications except those that have “deal killers” under their guidelines. A common example of a deal killer is an applicant who has had multiple repossessions.

Mainstream Lenders and

Independent Dealers

What if you are an independent dealer? What are your chances of getting mainstream lenders? At present, most of the finance sources are trying to develop an underwriting scheme for independent dealers. Unfortunately, there have been a few bad apples in the past that have made many of the lenders skittish about taking on more independents. However, if your dealership has sufficient net worth, stocks the inventory that a lender is willing to finance (many will not finance a vehicle older than five model years or with mileage in excess of 80,000 miles), a customer base that has a fair amount of applicants within the credit score range in the lender’s guidelines, and the appearance of your dealership is professional, then you have a better chance than you might have had a couple of years ago of getting mainstream lenders to sign you up. But, there are still banks and finance companies that will require five years in business as the first criterion.

Most franchise dealers have the advantage of the factory’s approval, which many lenders will rely upon for questions of financial stability, integrity, etc. I didn’t say it was fair, but that’s the way it is.

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Do Your Research

F&I Magazine’s Web site, www.fandimag.com and the National Automotive Finance Association Web site www.nafassociation.com, provide lists of representative nonprime/subprime companies and information for the banks and finance companies that you should contact. Another source is to speak with your colleagues in your 20 Group and see which banks and finance companies they are using and are pleased with. Most of the sales representatives of these companies are compensated based on finance contracts purchased from dealerships, so they are always on the lookout for new dealership customers who they believe will generate quality portfolio performance and therefore profitable business.

If you are not presently in the “other than prime credit” business, and you would like to learn more about how it works, there are consultants and organizations that will be pleased to help you. The main things to consider are your customer base, present and future (perhaps you will need to modify your advertising program), your inventory, your ability to hire a special finance manager who understands the business and who comes with good references (you may wish to check references with the banks and finance companies), and your commitment to make it work. How to set up the department, who to hire, obtaining the requisite training, and designing inventory mix can all be learned from a good consultant. Unlike your prime credit customers, the process is credit quality first, vehicle selection second.

That being said, what can you expect? On average, dealerships’ customer credit applications are conditionally approved about 45 percent of the time. There will be deal-structuring considerations that vary from lender to lender (down payment, amount of advance, debt-to-income ratio, payment-to-income ratio, etc.), which typically result in about 25 percent of the approvals ending in delivered deals. Hence, the 10 percent look-to-book mentioned above — 25 percent of 45 percent is 11.25 percent — is pretty close to the 10 percent of total applications that the lenders expect from you.

When it Comes to Nonprime Business, Ensure Contracts Are Complete

Is there anything different about nonprime/subprime business when it comes to getting your finance contracts funded? There is not, so long as the contract packages are complete, clean and accurate. In all cases, you can expect to be required to furnish proof of income, proof of residence, proof of insurance and personal references on every one of your deliveries. Sad, but true, these customers involve more risk for the banks/finance companies, and a thicker contract funding file is required. You also can expect that most lenders will conduct a pre-funding telephone interview with your customer to verify certain aspects of the deal. Do not be offended by this practice; it has unfortunately become necessary due to some level of dealer/customer puffery that has occurred in the past. Just deal straight up with the customer and the lender and you will have no unusual problems. However, claiming dealer installed adds that aren’t really there, overstating down payment, and accepting deferred down payments will all come to grief for the relationship between your dealership and the banks and finance companies.

Another interesting statistic from the National Automotive Finance Association’s Automotive Financing Survey is that the average time passage from the bank/finance company giving an approval and the contract being received at the bank/finance company for funding is around 16 calendar days. As the contract is usually dated the same day or perhaps one day later than the approval, the bank/finance company that purchases the contract enjoys a very nice return, as no cash is advanced to the dealership until the contracts are received and funded. With the issues of cash flow in the modern dealership, this is an area that should be watched very closely by the special finance manager. The usual culprits are stips; that is, stipulations imposed by the bank/finance company for the various proofs and references mentioned above. In training dealership personnel, it must be stressed that whoever is responsible, usually the sales staff, must be diligent in collecting the stips, or else the dealership will have a growing contracts-in-transit issue.

The “other than prime” customer market is huge and perhaps unfortunately, from a social point of view, growing. The opportunities for higher gross profits, a larger repeat customer base and increasing the overall sales volume of the dealership justifies the extra effort required to be an active player in this market. The banks and finance companies are available and are anxious to work with you as long as everyone plays by the rules.

Jim Bass is executive vice president of Drivers Select and chairman of the National Automotive Finance Association Inc., an online subprime finance company. Prior to that, he was founder, president and COO of Auto One Acceptance Corp., a nationally licensed subprime vehicle financing company.