Show me the Money!

There is plenty of discussion about money, or the “lack” of money as I should say, today throughout the automotive special finance industry. Dealers, finance companies, customers and even industry vendors are all scrambling for hard-to-find cash. Well, I’m going to help you find some by focusing on the three revenue centers of a special finance deal. These three centers for cash are what I call the “Trinity of Profit.” They are your only true sources of cash and profit in a special finance deal.

The Trinity of Profit:

• The Finance Company – No two finance companies are created equal, and each has what they consider the best model for making a profit by loaning money and collecting it. The key to success with any finance company is to build a real relationship with buyers and understand their program like it is your own. You must structure deals that best fit their parameters and have what they want in a borrower. Since there is no one-stop financing solution in full-spectrum financing, you need five to seven quality finance sources that cover the full spectrum of finance in your market.

• The Customer – This is the most overlooked source of cash. Too many sales teams lose the negotiation battle for cash with their customer because it’s easier to fold than it is to ask the customer face-to-face for something the salesperson believes the buyer does not have. I’ve sold too many vehicles to people with bad credit thinking I’ve gotten every last dime possible only to see the customer “pimp out” their new ride within the next couple of weeks with new wheels and LCD televisions. Apple doesn’t negotiate on the price of the iPhone, nor does Louis Vuitton on handbags or sunglasses, but we see special finance customers all the time wearing designer clothes or using expensive cell phones. Why? Because they want to. And, if you don’t ask for it, you’re surely not going to get it. The key is to get your customer to really want the vehicle you are selling more than anything else that is available.

• The Vehicle – Every vehicle has three different values: book value, market value, and actual cash value. If the ACV is too high, you lose. It’s that simple. You can sell vehicles all day long that make money at the auction, but if there’s not enough spread between 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 finance company. Otherwise, you’re making up the difference with down payment, or even worse, with lost profit, and there is a huge difference between the market value and book value of specific vehicles. The key is to know which vehicles have the largest spread between these two values and are vehicles customers want to buy.

Now I don’t mean to trivialize the business model, but I see too many dealers, managers and salespeople making the special finance sales process much more difficult than it has to be. Or, they cut corners and take shortcuts with pre-conceived ideas about the industry, the economy or the customer. There are processes that have a proven track record for success, and if the dealership team follows these procedures every time, without fail and with no exceptions, they will sell more cars and earn more money.

I realize fully that our industry is changing every day and there are experienced dealers who are really struggling to put special finance deals together, but don’t discard the fundamentals. The only way to overcome the many obstacles we face is to master the fundamentals that maximize the cash from each of the three sources and look for solutions instead of problems.

Let’s take a look at the finance company side of the equation. HSBC is out. Wells Fargo and Wachovia have joined forces to evolve the old WFS program and find a new niche. AmeriCredit is reeling from rising delinquencies in near-prime loans and struggling to find new sources of capital, and several other finance companies have tightened their belts significantly which has squeezed profits and sales from dealers. So, what do we do? Heed the words of Albert Einstein and mantra of the U.S. Marines: “Insanity: doing the same thing over and over and expecting different results.” Don’t be insane! Improvise, adapt and overcome. Find alternative sources, and with every finance company you use, adhere to three unwritten laws:

1. Dealers must know the top finance companies in their market and fully understand their programs.

2. Dealers must develop strong working relationships, or partnerships rather, with the buyers at a select few finance companies and send them plenty of deals that fit their programs. It’s a matter of quid pro quo.

3. Dealers must be proactive with originating and helping to manage profitable loan portfolios with their financing partners. Auto loan originations are not a one-sided business affair with the finance companies having the sole responsibility for portfolio performance. The crooks and criminals are quickly being weeded out.

A credit union can and will be a powerful finance partner for a dealer who takes the time to develop a strong working relationship with one. So can the smaller, local banks. They operate by different guidelines and restrictions than most other finance sources and tend to take an old-school, common sense approach to loan originations. If the deal makes sense and is submitted by a dealership they trust, the odds are that it will be bought and quickly funded.

Several dealers have realized this opportunity and although vehicle sales nationally have continued to slide, the credit union share of the market has increased according to the recent CUDL 2008 market report. Credit union market share reached 20.8 percent in September 2008, which was a three percent increase over September 2007. The report also shows that there has been a significant increase in loans for used cars. Take a look at the following graphs that highlight these two key trends.

Credit unions are increasing their share of the auto finance market by being a consistent, local alternative for consumer financing and partnering with dealerships that understand and pre-empt changes in the market. Together, they take a proactive approach to finance that mitigates the risk of nonprime automobile loans by focusing on a sound structure for each and every deal. It is an old-fashioned business model that has stood the test of time and economics and one that makes sense for the customer, the dealer and the finance source.

Deal structure determines profit and dictates loan risk, so deal structure will make or break a deal. The Cardinal Law of deal structure is affordability. Can the customer afford the payment? Can the finance company afford the risk? Can the dealer afford the profit margin? You can make every deal affordable by focusing on the Trinity of Profit and understanding the critical role each profit center plays in determining the profitability and collectability of a loan.