This column is dedicated to the Special Finance managers and other dealership employees from around the country that write or call (usually 15 or so new ones each week) asking how important the inventory really is to the success of the Special Finance department. It always leaves me dumbfounded. Actually, that would be an understatement. I mean, let’s take the Special Finance department out of the equation. For your conventional business, would you put your line-technician in charge of ordering your new vehicles? Or a color-blind person in charge of selecting your exterior and interior color choices? Of course not. Why? Because your inventory is too important. It is what your customers are looking for, and without it, they will buy somewhere else.
Back to Special Finance. Let’s first understand a couple of points. We know that 80 percent of all sub-prime loans that are funded by sub-prime lenders are under $400 per month. That is funded, not approved. Pretty significant. That also means that many customers are contracting at $300 per month, and less.
The next issue at hand with Special Finance is that the loans become collateral or equity-based. They are also discounted. This simply means that the book value of the vehicle becomes a hard-cap which is nearly always going to be the limiting factor as to how much can be financed. Additionally, these loans are almost always written at a higher interest rate, and often for a shorter term—again, driving up the payments.
What this all adds up to is that using a 60-month term, 21.0 percent APR interest, 6 percent sales tax and the typical $1,000 down payment, the hard-cap for the sales price on the transaction is $14,900 to keep the payment under $400 per month—where 80 percent of all funded deals wind up. Allowing for a $500 discount from the lender, to achieve the benchmark gross profit on the deal, the vehicle must book for at least $12,950 and you must own it for roughly $1,000 less than that. Of course there is no room for a service contract at that payment and the benchmark $744 additional profit that it would generate. Hence, the hard-cap for Special Finance inventory winds up somewhere in the vicinity of $11,000.
I recently had the opportunity to interview most of the top ranking dealers in the Leedom and Associates Top 25 Special Finance rankings, many of which were already clients. When asked the average wholesale cost of the vehicles they sold, the replies ranged from $8,000 to $9,500. These are dealers that are selling hundreds of Special Finance deals per month. That is some pretty credible information.
The bottom line is that there are countless dealerships that have an abundance of used car inventory, and think they are set for Special Finance. Even if they have 200 used vehicles, however, it is all for naught if the Special Finance department is left with nothing but an abundance of vehicles with an inventory value of $15,000+, or that is at or above book value. Deputy Barney Fife had more bullets in his gun than that.
People often wrangle when I state that I believe that inventory is more important than personnel. Make no mistake, I always state that to be successful you have to have both, but I have personally witnessed in many dealerships a “green pea” that is coached well by the desk land a $4,000+ gross profit—not because of his skill, but because of the inventory. I have witnessed just the opposite as well. I have seen some of the most professional sales personnel stymied with a sub-prime customer because the dealership is upside down in its inventory and essentially has no way to structure a profitable deal.
Speaking of which, it also amazes me that some dealerships have no problem maintaining an optimum Special Finance inventory and keeping it fresh, while others, in the same market, struggle to do even half as well. First, let me say I have never seen a market anywhere in the country where you couldn’t buy vehicles for Special Finance. All you have to do is to know your lender’s programs, be able to use your guide books and use some discipline.
What causes that comment is the epitome of the “grass is greener” syndrome. On the same day last month, I talked with three dealers in three different markets—one in Kansas, one in Texas and one in Wisconsin. All three were convinced that they had to leave their market to buy vehicles. You guessed it. Texas was going to Kansas who in turn was going to Wisconsin, who naturally was going to Texas. Of course I knew other dealers in the same markets that were staying “home” and making out extremely well with their local auctions. “How can that happen?” you ask.
The truth is that it happens all the time. There are some buyers that can spend all day at an auction and never see the first Special Finance vehicle, and at the same auction a different buyer may find two truckloads. It is just training the mind and the eyes in what to look for (and where), and communicating with the Special Finance Manager to have an understanding of what vehicles and price ranges will work well with the lenders.
So where does all this commentary lead us? As I said at the onset, this is dedicated to the Special Finance managers struggling with inventory.
If you are a typical department of two people, you are likely selling roughly 25 vehicles or so per month—or should be. To have sufficient stock, you should have in inventory at least 80 percent of your forecasted sales level (in this case 20 units) in the $7,000 to $11,000 range (at wholesale cost) at a minimum of $500 behind book value (usually much more). This will allow you to sell 80 percent of your vehicles for under $400 per month, and do so while achieving benchmark gross profits. Without it, you will struggle with mediocre gross profits and deals that you just can’t find a way to put together.
This inventory exists in virtually every market in the country. Find it, and you will find the key to unlock the hidden treasures in your Special Finance department, and your results will soar. It is that simple.
Until next time, make it a Special month!
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.