Necessary Changes in Special Finance

Dealers Reveal Secrets to Survival

As the end of 2009 approaches and dealers look toward 2010, it seems like a good time to take stock of the past year and look at how those in the field of special finance have adjusted their operations to stay in the game. Tighter lending requirements, fewer finance sources and wildly fluctuating used vehicle values made this year a true test of dealerships’ strength and agility in the subprime market.

Special Finance Insider surveyed a few hearty souls toughing it out on the front lines of special finance to find out how they’ve fared and what they’ve done to sustain their efforts in 2009.

Have you made changes to the types of marketing and advertising you use? For example, have you added or dropped anything? Was there any item that really performed well for you?

Richard Conrad, Special Finance Manager, Paul Miller Autogroup, Lexington, Ky.: We have made several changes to our marketing efforts in 2009. For the last quarter of 2008 and for the first and second quarters of 2009, we chose to scale back our special finance advertising, relying instead of customers coming in off our normal advertising campaigns and word of mouth. Recently, we have redesigned our marketing efforts; we are purchasing more leads and searching for new direct mail companies to reach out to new customers. We have been excited by the response from both sources, and we are looking forward to a fantastic close to 2009. One thing that we have found to work especially well for us and have done for several years is our own mailing campaign to open Chapter 7 customers.  

Scott Elder, Owner, Dream Cars Credit, Austin, Texas: We pretty much held advertising steady through the downturn and cut expenses in other areas. Craigslist performed well early in the year, but seems to be tapering off a little lately. With craigslist you have to keep adjusting what you do there to stay ahead, e.g., more postings, trying different times and different ad layouts.

Curtis Mummert, Owner, Buchanan Auto Park, Waynesboro, Pa.: Overall, we’ve looked at almost every aspect of our special finance operation. Advertising and marketing is our second largest expense. We always measure lead sources and ask customers what brought them in. For 2009, we’ve seen a decline in the quality and quantity of third-party leads. This caused us to sever ties with three longtime lead providers. Some of the savings has been reallocated into generating more of our own leads, as well as into other media.
 
Kris Wright, President, Secondary Solutions. Ms. Wright is currently consulting as a full-time special finance manager at Pogue Chevrolet, Central City, Ky.: Advertising has not changed in our world. Diversity here is the best practice, things like radio advertising and 15- to 30-minute television spots (with inventory shown in the commercials) on local cable access channels. It’s also a good idea to incorporate the dealership’s Web site into all advertising; it brings good, solid, ready-to-buy leads directly to our computers. I’m also a fan of doing your own bankruptcy mailers; the challenge there is developing a mail piece that people will open and not automatically throw away. I use PACER to monitor bankruptcy filings, meetings of creditors and discharges—those people will all need a vehicle sooner or later. I feel like this is the richest lead source you can do at this time. Friendly Finance will still do the open Chapter 13, so we can market to those customers with a mail piece as well.

Who do you purchase third-party leads from? How many total third-party leads do you purchase each month?

Conrad: We purchase leads from RoadLoans, which is anywhere from 15 to 20 solid leads per month. We also use a direct mail company that provides us with 1,500 to 2,000 pieces per month to conquest customers.

Wright: RoadLoans now has a program where you can purchase their leads; they are some of the best quality leads I have found in a long time. InterActive Financial Marketing Group is another great third-party lead provider.  

If you do not purchase third-party leads, how are you generating enough SF leads?

Elder: We generate special finance leads through our Web site, and we drive traffic to our site via Google, Yahoo!, craigslist, AutoTrader and cars.com
 
Have you had trouble with quantity or quality this year? If so, how have you offset it?

Conrad: Early in the year, we used some other direct mail companies that did not work for us as well as we expected. The response rates were poor, and the quality was worse. They were larger drops – 5,000 to 8,000 pieces – and we were lucky to sell five vehicles. Now, we only work with credible companies we know will give us a strong return on investment.

Has your closing ratio changed much this year for third-party and/or organic leads? What are the current closing ratios?

Conrad: Our closing ratio has decreased in 2009 primarily due to changes in the lenders’ programs and finding adequate inventory. Our closing ratio for third-party is 10 to 12 percent, and for organic we are seeing about a 17 to 20 percent closing ratio. 

Elder: Closing ratios decreased on our leads to five to seven percent late last year and early this year, but we are back to around 10 percent.

Mummert: Our closing ratio has been inconsistent this year. However, the causes have been more from within than external, the only exception being some of the lead providers we cut. As long as we follow our processes, we are pretty consistently in the 20 to 30 percent range.

Wright: Due to the lack of finance sources and the quality of the paper steadily decreasing, our closing ratios are deteriorating. To overcome this, we just load the wagon with even more leads; after all, sales will always be a numbers game.

Have you found that you have had to purchase a different type of inventory to put deals together this year? If so, how has it been different?

Conrad: Finding, keeping and maintaining the right mix of inventory this year has been incredibly difficult. It seems like the lenders have been adding brands to their “restricted list,” almost daily, couple that with the fact that auction prices are off the charts, but the book values have not adjusted. We are keeping and reconditioning a lot more of our trade-ins. High-mileage or older cars that we would have wholesaled last year are ending up on our front line.

Elder: We have had to purchase lower cost vehicles to get deals done through Credit Acceptance with reasonable down payments.

Mummert: Inventory has been a struggle—wholesale prices higher than normal, guides not adjusting fast enough, finance companies cutting advances. The combination has made acquiring the right inventory at the right price so you can sell it to the right customer very difficult. That said, we’ve managed to adjust. We’re keeping older, higher-mileage inventory, buying cars off the street from private parties—whatever it takes to get inventory.

Wright: We’ve had to change our vehicle buying practices. With the lower bank advances, we watch out for the top trim levels because those vehicles carry a larger book value and usually have a larger spread, allowing for more gross profit. When buying for a program like Heritage (165 percent advance), the book is not as important; keeping cost around $5,000 is the biggest key to working that program and generating good gross profits. We also acquire good inventory from rental car companies.

Have you had to make changes to your sales process? If so, how have you changed it?

Conrad: Our sales process used to consist of having only a limited number of dedicated sales associates work special finance customers; if you weren’t in the department, you would have to split the deal. Now, our sales staff is better trained in all aspects of selling and can work the deals with me or the other special finance manager without having to split the deal. It is a much more open process and really works well for us. We have also changed our F&I process; now I contract all the special finance customers. It has streamlined the whole sales process and improved our funding time.

Elder: We have had to put more focus on switching customers to lower cost vehicles and getting even more down payment. We have always done this, but it has become even more critical.
 
Wright: The sales process is a different animal. The special finance customer got spoiled; they dictated what they wanted for a long time. Well, those days are gone. Now the bank is dictating what they can and can’t buy. You have to convince them that obtaining financing and re-establishing their credit is much more important than the kind of car they drive. You need to emphasize the idea that if they repair their credit, they’ll be able to choose any car they like. As I always say, you are not buying a car; you are buying your credit. We once had a customer who cried while she was signing her papers because it was not the unit she wanted, but now she is back on track.

Did you have to make personnel changes this year? Cutbacks or realigning job duties? If so, what did you do, and how it has affected the department and sales?

Conrad: In the last quarter of 2008 we closed the special finance building, which consisted of two managers and six sales associates, and moved them into new and used sales. As a result, our special finance sales declined. In the spring of 2009, I was chosen to restart our special finance department, which has seen a steady increase in sales and gross. We have also started to expand the department by adding a second manager. 

Elder: We cut some positions, reduced some compensation plans and ruthlessly cut overhead, but we have now brought the compensation plans back in line with what they were before.

Mummert: Personnel is our biggest expense. We have had to replace several salespeople throughout the year. The quality of candidates has improved over the last few months. Because of the volume, we run with two managers. We went through a rough time keeping the second manager this year. The “traditional” special finance manager, if he/she hasn’t adapted, has had a hard time making the income they’ve grown accustomed to and keeps looking for greener pastures. We decided to instead promote a salesperson and reclassify the position as an assistant to the manager. So far this seems to be working.

Have you been able to add any finance sources?

Conrad: Yes, we have had to really think outside the box when it comes to looking at funding sources. We use a lot of local finance companies like Professional, Nicholas and other smaller companies—the old-school lenders where relationships are everything. They also have fewer restrictions on vehicle age and miles. Also, our relationship with Ford Motor Credit Company has really been beneficial to us. They are working hard on finding ways to put deals together that make sense for all parties involved.

Elder: It has been tough, but we added MILES/US Bank this year. We also just added AmeriCredit and are very close to signing up another bank and local credit union.

Mummert: We haven’t really added any new finance sources this year. We decided early in the year to do business with a select few sources that have stayed consistent in the market.

Wright: We have added lenders like Heritage Acceptance out of Elkhart, Ind., and Friendly Finance. We also added Westlake Financial, both for their regular program and for their Buy Program. Since we do not focus on buy here pay here, the Westlake Buy Program is a good option. It allows us to finance the bottom-tier customer without the exposure of doing BHPH, and hopefully we’ll win a customer who will come back and buy for years to come.

Which finance companies have been the most reliable for this you this year? And why?

Conrad: Capital One and Chase Custom have both been extremely reliable for our special finance department at Paul Miller Auto Group, especially when it comes down to funding; they are fast and consistent.

Elder: Wachovia primarily and Credit Acceptance secondarily. Through the downturn, both sources kept financing deals for us when others just shut the doors and stopped buying.

Mummert: AmeriCredit, Capital One and Chase have been good for us. Credit unions have picked up a good portion of business. We use Credit Acceptance Corporation and Westlake for the bottom tier.

Has your average down payment changed this year? What is it now?

Conrad: Our average down payment increased, to around $1,500 to $2,000 per copy. In the past, the average has not been as high as we are now seeing.

Elder: No, it has not really changed; it’s just that the customer is getting less car for the same down payment.

Mummert: With high wholesale values and lower advances, the only place to get the difference is from the customer. We were a little weak earlier in the year, probably averaging around $1,000 to $1,200 down. We went back to basics, worked our process to get that little extra cash, and down payments have increased the last several months. The average now is around $1,800.

Wright: We are seeing now, it is approximately $1,500.  

Have you seen an increase or decrease in the average amount financed? What is yours currently?

Conrad: The average amount to finance has deceased, primarily because of more Credit Acceptance loans and use of local finance companies. Our current average amount financed is approximately $11,000 to $12,000.

Elder: We’ve seen a decrease of a few thousand dollars. We are currently at an average of around $12,000.

Mummert: Our average amount financed is definitely down, I’d have to say, by about $3,000. In 2008, we were around $13,000; now, we’re probably close to $10,000. The combination of lower advances, struggles with down payment throughout the year and lower ACV inventory has brought that number down. All in all, though, we’ll have a better ‘09 than ‘08.