Fourth in a Series of Articles on the Eight Essential Elements of Special Finance
Assuming you have satisfied the first three essential elements of Special Finance – made the commitment, acquired the correct inventory and hired and trained good people – you are ready for the fourth step. The lenders.
Granted, at this point you probably have already begun the process, at least the research. Based on the hundreds of e-mails that I get each month, the research seems to start pretty early on.
Years ago, in the early days of Special Finance they were a dime a dozen. Finance companies and banks would have offshoots split off and start another and another and so on. A dealer could have little regard for lender relationships, because there was always another lender around the corner.
That was then. That was before the restructurings, the mergers and the failures. Today’s climate is much different. It has been for some time. Rather than taking lenders for granted, now dealers must look to foster strong relationships – striving to provide profitable win-win relationships for both sides of the paper.
Given the new and more positive climate, the question that always hits my e-mail box or voice mail is, “Who should I be doing business with?”
Not to sound like an attorney friend of mine, but it depends. Are you a franchise store or an independent? If you are a franchise, which captive do you do the primary block of your business with, and do they have an affiliated sub-prime company. It just isn’t cut and dried.
If you are an independent, it is even more complicated. I have had the pleasure of working with some of the most sophisticated independents in the country. They out earn, are better capitalized and are superior to many of the franchise dealers in the marketplace.
However, by virtue of the fact they do not have a franchise sign planted in front of their dealerships they are arbitrarily excluded by some of the top tier Special Finance lenders. For the rest, they simply have to prove they can walk through fire, then on water, while at the same time creating world peace. Bottom line is, whether fair or not, Independents must cherish any lending relationship that they are able to create.
Which one is the best? It is simple. Whichever ones you can create!
OK, by now, you are saying, Greg, you haven’t given me many specifics.
Well, I have given you the basics. Whether you are franchise or independent, you must foster strong relationships with whomever you are doing business with. Those relationships will make you thousands upon thousands of dollars.
OK, I hear you still chanting ... “Which ones?!”
I am not ignoring the question, but often people will spend more time trying to cultivate a relationship with the next lender while foregoing the opportunity to build a stronger and more profitable one with the lenders they are currently using.
Additionally, keep in mind that I always remind dealers that the lending climate is like looking at the sea. You have high tides and low tides. Some days you are on top of the wave and some days you are in its trough. Lenders are fluid depending on existing loss ratios, cost of funds, stockholder edicts, and pride of management.
I once thought, mistakenly, that if a lender wasn’t playing ball today that they would never be a valuable partner in the future. I certainly learned differently in the mid to late 90s when they all hit bumps in the road, with many coming back stronger than ever.
Yeah, I still here you chanting, “Which lenders?!”
OK, in this same issue, the 2005 Dealer’s Choice Awards has announced the top six Special Finance lenders as chosen by dealers. At this moment in time, your peers, not Greg Goebel, have chosen the best of the best.
Those best are in order, Regional Acceptance, Centrix Financial, TranSouth, Capital One, Wells Fargo Financial Acceptance and WFS.
All but Capital One and Wells Fargo currently do business with Independents, and those two are testing ways to expand into that market.
Does that mean that the aforementioned are the lenders you need to use in order to excel in Special Finance? Well certainly it wouldn’t hurt, but keep in mind many of those lenders occupy the same market niche. If you just have those lenders in your arsenal, then there will be a lot of deals that you can’t put together.
Furthermore, there are a number of outstanding lenders that for one reason or another were not ranked in the Dealers Choice Awards. Does that mean they don’t count? Absolutely not! I could list a minimum of 20 lenders that would be of value to any dealership. A good example would be Tidewater Motor Credit. They do an outstanding job with Open Chapter 7 bankruptcies, but being a smaller volume niche lender, they simply didn’t garner enough votes to be ranked. That doesn’t change the fact that they account for $75,000 per month in gross profit to some skilled Special Finance dealers.
It is important for all Special Finance dealers to cover as much of the credit spectrum as possible, with aggressive lenders offering the lowest discounts and interest rates. Just realize that it is no different that anything else, the grass isn’t always greener on the other side.
So how can you be a better partner to a lender? For starters, ask them what they are looking for in the relationship. It is important for you to know what is important to them. Look-to-book ratios? Approval-to-funding ratios? Minimum number of contracts per month? First payment defaults? Charge offs? What ever it is, you need to know it so that you can help monitor and manage it.
What else? You need to know your lender’s guidelines. Better yet, know what the guidelines really mean. If their grid goes down to a 520 Beacon, but they only buy 5 percent of the apps submitted below 575, don’t bury them in apps that they are not going to approve and fight them over why they aren’t buying stronger.
Make sure your funding packages are sent in clean and organized. Make them complete and have them organized, consistent with the lender’s funding checklist. The funding clerks in your lender’s office will not only appreciate it, but your deals will fund like greased lightning.
Lastly, don’t betray their trust. At least half of the people working at the banks and finance companies in sub prime have worked in dealerships. They didn’t fall off the turnip truck last night. They just want to be able to count on whatever you are telling them is the truth. And remember, no deal is worth putting the whole dealership at risk.
That leads into the other part of the partnership, the Dealer Agreement. The partnership in writing. Not all dealer agreements are created equal. Remember, regardless of what a lender’s agent tells you, it is what is in writing that counts. They can choose to look the other direction on something that is in direct violation of a dealer agreement, until they decide not to.
Read the dealer agreement before you execute. Know what you are signing, and what liabilities you are accepting. If you don’t understand it, pay your attorney to help you. That is your other obligation of the partnership.
That brings us back full circle, to which lenders and how many do you need? Most dealerships can get by with 5 – 7 lenders, as long as they cover most all credit spectrums and customer profiles. Once you identify them, work to solidify the relationships. If you work as hard at making your lender partnerships flourish as most dealers work at finding new lenders, in most cases, you will wind up much happier and profitable!
Vol 2, Issue 4
ADESA has named 20-year industry veteran Dave Fountaine as the new general manager of its Buffalo auction.