What is the difference between three and five? If you are an automotive dealer, the answer to that seemingly simple question might be plundering your bottom line.

As dealers and their customers struggle through a tight credit market, lenders are changing their financing practices. Rather than approving a loan amount for line three of the installment contract, lenders are setting the loan’s value for line five. As a result, the approved loan amount often cannot be stretched to include F&I products. So what’s a dealership to do? With a little homework and some good old-fashioned relationship development, auto dealers can once again regain their line-four profits.

Step 1: Focusing on Line Five

Line four of the installment contract can cover a wide range of products: vehicle service contracts, gap insurance, credit life insurance, credit disability insurance and more. When a lender approves an installment contract based on line five, it leaves the dealer with few options to sell these complementary products. When that occurs, the dealership could convince the buyer to put money down for the insurance or vehicle service contract, which would be a tall order given the current economic environment.

Another option is reducing the selling price of the vehicle or increasing the value of the trade-in. Neither of those options are attractive, because both further drive down profits during a time of already razor-thin margins.

There is a better way to realize additional profits. It involves dealers working to get line-three approvals. Achieving that, however, will require a little research and some relationship building.

Step 2: Know the Insurer Backing the Product

The best way to sell a product is to believe in it, which is why the line-four products your dealership carriers should be thoroughly researched to ensure they are provided by high-quality firms.

For example, when researching a company offering insurance, determine whether it is a traditional insurance company or a risk retention group (RRG). A traditional insurance company must comply with each state’s department of insurance. In contrast, a RRG is a federally-chartered company that is not required to be under the jurisdiction of a state’s department of insurance. There are several examples of why this distinction needs to be made.

In 2003, a large RRG went bankrupt, leaving millions of consumers holding worthless service contracts. As a result of this and similar situations involving other RRGs, lenders are much more trusting of traditional insurance companies. Just make sure you know the insurance company’s A.M. Best Rating, and make sure you’re familiar with the company’s history in the industry.

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Step 3: Research the Product Administrator and Obligor

Dealerships should also investigate the company that serves as administrator and obligor on any products it sells. To avoid dealing with unscrupulous administrators, thoroughly investigate the company’s track record, and make sure it is licensed in the states where you do business. It’s also a good idea to study the company’s claims paying history, the quality of service provided to dealers and consumers, how long the firm has been in business, and the company’s financial stability.

Bottom line: Make sure the administrator has pockets deep enough to survive today’s economic turmoil, as a reputable, well-established company should have substantial cash reserves to protect dealers and customers. Remember, financial strength counts. All too often, small administrators and others who are new to the business lack the resources and expertise necessary to safeguard those affected during a financial crisis.

Step 4: Focus on Lender Relationships

Once the dealership has thoroughly researched and chosen high-quality vendors for line-four products, it’s time to approach the lender.

In the past, dealerships could choose from an almost limitless number of lenders with which to do business. Lenders were anxious to make as many loans as possible, and, in some cases, regardless of quality. Times have changed. Fewer lenders have funds for loans, and those that do have tightened their requirements substantially. Suddenly, relationships matter. That’s why it’s a good idea for dealerships to choose their top two or three lenders and work to nurture those relationships. Doing so might involve:

• Presenting research about the dealership’s preferred providers for insurance and service contracts. By showing that these companies are stable and reliable, lenders will be less wary of advancing funds to purchase these policies. Remember, if a car is traded in, repossessed or sold, a portion of the policy price is refundable to the lender.

• Reviewing your loan portfolio with your lender will help demonstrate a high-quality clientele that tends to successfully pay off loans at a higher rate. Doing this will encourage lenders to give more line-three approvals.

• Communicating more effectively. Remember to be forthright. Include the additional products in the initial loan request, and explain the value any add-ons may provide the lender. Work with the lender to encourage a higher loan advance while demonstrating that the deal is good for everyone — the consumer, the dealer and the lender.

• Go to lunch. Whether over coffee, dinner or a game, dealers should spend face-to-face time with their preferred lenders. As any good car salesman knows, tight relationships go a long way toward getting the deal done.

John Sauers is vice president of CoverEdge Worldwide, Inc., a subsidiary of Warrantech Corporation. He can be reached at john.sauers@bobit.com.