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 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, a Houston-based consulting firm specializing in department setup and growth. E-mail Rob at [email protected].