Three Essentials for Survival in Special Finance
What do you do when your go-to finance companies are not buying? What do you do when sales are down and you see customers leaving your store without a car? What do you do when your business model no longer delivers the profits it once did? The answer is to change. According to Mark Sanborn, “Your success is not based solely on your ability to change. It’s based on your ability to change faster than your competition, your business, and your customers,” and I wholeheartedly agree.
We live in the information age where encyclopedias, current events, training, hoards of information and education are only a mouse click away, yet it is still very difficult to keep up with all the changes occurring in the automotive and finance industries. From the looks of things, it’s going to be a while before the dust even starts to settle. We are living in strange times, and in the midst of all this chaos, there are three commonalities that successful dealers share when it comes to the non-prime customer. These three things are critical for your success in special finance.
1. A Subprime Finance Solution – For years, dealers have been able to dabble in special finance and still make a sizeable profit. For more than 10 years, several large finance companies have offered financing options for non-prime customers that afforded dealers the ability to sell a credit challenged customer and earn a $3,000 gross profit, but recently, that’s all changed.
Yes, there are still several strong finance companies focused on the non-prime segment of the market, but the credit requirements and underwriting guidelines have tightened tremendously. I doubt very seriously that we will ever see the days of 150-percent LTV advances and 72-month terms for bad credit customers again. Instead, dealers must look for viable alternatives and change their business model as they attack the fastest growing segment of the market. To be in special finance today, you must have a deep subprime finance solution. Here are some options:
o Credit Acceptance is a great program for dealers who have the customers, but lack the ability or desire to delve into buy here pay here. The company was founded by Don Foss in the early 1970s and has survived and thrived throughout the years because of their inherent ability to collect payments from the deep subprime customer.
They specialize in financing customers with FICO scores below 600 and advance dealers a percentage of the installment contract up front. As the payments are collected, they split the collection stream, with 80 percent of the net payments going to the dealer. They also score each applicant with a highly sophisticated credit-scoring program called CAPS. This program compiles over 30 years of data to predict how a customer will pay for specific vehicles the dealer has in inventory. Their completely non-recourse program has proven to be very successful over the years and has made dealers across the country a lot of money, as well as given them the ability to offer guaranteed credit approval. They are a must-have for any special finance department, especially today.
o Westlake Financial Services is a privately held finance company that specializes near-prime to deep subprime retail installment contracts. The Los Angeles-based company’s roots are in BHPH. For more than 20 years, they have given dealers an excellent platform to score and finance customers with low credit scores. Today, they are in 36 states and will compliment any subprime lending portfolio.
o Western Funding Inc. is much less technical than other subprime financing options, and that is perhaps one of their strengths. If a dealer has the aptitude for special finance, Western Funding has the money to loan and the ability collect it. Their programs are straightforward, easy to use and apply a common-sense approach to special finance.
o BHPH—Any dealer who has experience in special finance should consider buy here pay here. Even if you don’t have deep pockets to start funding a multi-million dollar portfolio, BHPH can be the best business decision you’ll ever make. You can build a successful finance pool one deal at a time, as long as you understand the fundamentals and pay attention to every detail of your venture. The returns on your investment and business freedom are well worth the costs.
2. Inventory – You can sell vehicles all day long that make money at the auction or for the cash or prime credit buyers, but if there’s not enough spread between your actual cost and the preferred valuation guide in your market, you are wasting your time selling the wrong vehicle to a special finance customer. You need enough spread behind the book to cover the discount fee plus any acquisition fees from the lender. Otherwise, you’re making up the difference with down payment, or even worse, with lost profit.
The ideal special finance vehicle is one that customers like and want, has enough spread between the cost and book value, and will outlast the term of the installment contract. There are several products that will help dealers locate inventory that meet these requirements, and one new product is the Vuenu market report. Vuenu compiles wholesale and retail market data and compares it to auction run lists and several valuation guides. The report lists the preferred vehicles in a given market and ranks them based on spread between cost and the book. From this report, a dealer can pinpoint which cars to buy for special finance inventory and where to buy them.
3. A Set Sales Process – If you implement a detailed and consistent sales process and execute it every time, you will find that your team will understand procedures more clearly and your sales will improve with every deal. Your sales ratios will increase along with the gross profits as long as the process works. Your customers will be more satisfied and the turnover among your sales staff will decrease. We are all creatures of habit, and the more we do something, the better we become at doing it.
A set sales process is absolutely critical for special finance. Otherwise, your sales team will not be able to divert the credit-challenged customer from vehicles that cannot be financed profitably for the dealership or affordably for the buyer. Your down payments will be low and your sales conversions lackluster. Develop a process that works and execute it every time, all the time, without fail, and with no exceptions.
These three categories are where most dealers fall short. Even dealers who have been involved in special finance for several years tend to flounder in one or more of these areas. However, every successful special finance dealer knows the importance each category plays when it comes to putting together a profitable subprime deal and there are plenty who have mastered the execution of each fundamental. As a result, these benchmark-setting dealers are thriving despite the current credit crisis and economy.
We have to be tactically-minded and proactive in our thinking to evolve with the times and meet the needs of the consumer. Clearly understanding the market and the current conditions of the automotive finance industry is important for success, but it is our reaction to these conditions and events that will determine the shape of the future. Your ultimate success is more a matter of perspective, attitude and willingness to improvise, adapt, and overcome.
Vol. 3, Issue 3