When Not to Make a Deal

I sit back and scratch my head sometimes at some financial institutions. When I was a SF director, they would come in one after the other and one bank would tell me how much they love the “D”-tier co-buyer when placed with the “A”-tier buyer. One bank even went as far as to tell me this was their best-performing paper. Then, the next bank representative walked through my door and told me how that paper doesn’t perform at all and that they don’t even consider it. How is it that one bank loved an open bankruptcy and said the reward far outweighs the risk, while another bank told me they don’t consider a bankruptcy until six months after discharge, and even then, the customer had to have re-established credit?

Has all that gone away now? Was one bank right and the others just too aggressive? Were we too aggressive? Are there still niche lenders? Well, my answer is there are a few niche lenders left, but not many. For those banks that have niche programs, those programs are slimming down faster than the rest of the market.

I wrote an article many years ago before the all-but-collapse of our economy was on the horizon because I saw a trend based on questions I was asked by other managers. The title of that article was, “Who Is Buying Under a 475 Without a Big Discount?” My answer within the comments of the article was nobody! Why? Because that customer doesn’t pay! I found myself in a conversation with a few guys and gals at the 2008 Special Finance Convention and the comments were going back and forth amongst everyone: “This bank isn’t doing this anymore,” or “This bank has stopped this or that …” and the comments went on and on, and it turned into complaining.

I had to interrupt the conversation. I simply asked all of them in this circle: “Have you ever ‘kicked’ a trade? Have you ever put someone in a car you know they can’t afford? Have you ever asked for income to be waived because you couldn’t prove it the way the bank would prefer you to prove it?” After they all got quiet, thinking about what I had actually said, I finished my thoughts. “This is our fault. We caused this mess, and instead of pointing fingers at the banks, we need to take a cold hard look at what we do in our processes and ask ourselves, ‘What we are going to do to make sure the banks that are left will be here at next year’s convention?’”

Now, I’m a car guy. This business is all I know. I understand how hard it is when you have a car deal staring you in the face, and you see how easy it would be to shove that deal down someone’s throat and make the bank finance it just by flirting with your ethics for a second. It’s when that thought turns into a second thought, we find ourselves in the mess we are in now.

As I said in that article I wrote years ago, we need accountability in this business. We need stability, but it has to start on our end. If you haven’t noticed, the banks have caught on and they are holding us accountable now anyway. But, I hear it from every bank rep or high executive I talk to that managers are still trying to push the envelope. We are in an interesting time when banks have the upper hand. Old-school general managers or general sales managers please read carefully: Gone are the days where you can make a bank buy something because you think it is a deal. You will earn the bank’s business now, not the other way around.

It’s almost as if we are starting over on the financing side of this business. We have banks turning off under-performing dealers left and right, and we are all scrambling to make heads or tails of the new program restrictions that are hitting our fax machines every day. Some banks are asking you to pay for training before getting turned back on; others are making you jump through various hoops. It’s time to take a look at this from the financing side of the business.

One top special finance institution shared that it costs in excess of $10 to automatically turn a deal down. Now, take that and multiply it by all the dealers who don’t have a clue, and then take that number and imagine how many times that bank has been “shotgunned” by a dealer. It gets expensive. Now take a look at the deals that get past the “shotgunning” part and how many dealers don’t know how to structure a deal or understand the differences in a line-3 bank, a line-5 bank and a line-7 bank.

So, now we have man-hours involved in trying to educate dealers on the fly, as well as bank reps whose job it is to educate you in person. But wait, we haven’t factored in the human side of all of this; our “car guy” ego that can’t fit into the building. I try to train dealers who pay me to educate them, and their egos are still unbelievable. Now taking that into consideration, understand how frustrating and time-consuming it has to be to train a guy over the phone or in person who has that ego.

Now, we don’t have a choice but to take this financial crisis into consideration. The loans we have shoved down the banks throats in years past because our egos won’t get out of the way of common sense are all coming back to bite us now.

In today’s market, it is more important than ever to make your finance companies one of your top priorities. When was the last time you asked your finance sources for a review of your portfolio? A portfolio review should be of paramount importance right now in this market. Ask your representative to explain what is acceptable and have them point out where you are lacking in your portfolio. Do you need more “B” paper with that company to offset the “C” and “D” paper in it? How are your delinquencies? What about first payment defaults? Has your dealership considered a policy of buying back all first payment defaults with the finance companies’ assistance in locating the customer?

Start by cleaning up your current portfolios and getting a firm understanding of the expectations of every finance company, and then strive to be an overachiever in those expectations by reviewing your portfolios regularly. What about that deal you know isn’t a good deal, but you might be able to slip past your bank? Instead of taking that one deal, it goes a long way to call that bank back and say, “Hey, I appreciate the approval, but I have some additional information and I can’t in good conscience have you buy this deal.”

Special finance is still a very viable business to be in, and niches, while they are slowly going away too, still exist on a smaller scale. Banks are working smarter; it’s time for us to catch up as well.