As we discussed last month, more and more franchise dealers are building up their in-house finance portfolios as many lenders continue to restrict or discontinue their subprime programs. In speaking with dealers who have already made the jump into the treacherous but profitable waters of buy-here, pay-here, we also learned that the key to success is preparation and education.
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.”
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.