My Line In The Sand

If I had a dollar for every time I received a call or e-mail from a Special Finance (SF) manager asking where their dealership should draw the line in the sand separating prime (regular F&I) from sub-prime credit customers, I might not have to write my monthly columns! For what ever reason, during the last few weeks I have been covered up with this question and have worked with some large and successful organizations that for some reason or another have struggling both with this question as well Special Finance in general. Hence, it has become the impetus for my column of the month.

I am going to sidestep the usual accompanying issue, separate or blended departments – at least for now – and focus squarely on the issue at hand: the proverbial ‘Line in the Sand.’

For those of you that have read my writings over the past eight years, you know I have always resisted, whenever possible, drawing an arbitrary line at a credit score to proclaim whether a deal belongs to one side or the other. During the period at my stores where we had a separate department, I really didn’t care who thought it belonged to whom. The deals belonged to me, and I wanted them turned into deposit tickets regardless.

I have stood firm in resisting to draw the credit score line in the sand to this point. The reason is depending on the depth of the available captive or prime finance companies, there is a cavernous spread between what one prime finance manager can get placed through traditional channels and another cannot.

Over the years I have worked with many dealers whose prime finance departments run out of steam at a Beacon or FICO score of 620, and others (one very recently) where you have to shake your head in amazement at what their prime finance departments can get placed (can you say sub-500s). To one department, a 550 might as well be a zero, and to the other, it is a cinch. Again it falls back to which department can most effectively work the deal and customer involvement.

Finally, some have asked me, “Do we ever really need to draw a line in the sand?” Well, yes, no and sometimes. Flip a coin.

It really depends on the structure of either your department or your selling process. Some dealerships have a blended department where everyone works with all types of credit customers and buyers. This is most likely not the case or at least not until the deal actually goes into approval, rehash or funding. Most often, larger volume stores want a limited number of people working with the buyers and funders at the SF companies. In those cases, a line is drawn, but the line is based more on which finance companies will be involved rather than a number.

If you are working a separate floor, then yes, what I call the green balloon (prime)/red balloon (sub-prime) line must be drawn in order to get the customer to the proper department to work the deal.

So you ask, where do I draw the line? It is simple, and if you think about it, it is common sense. I suggest that after a customer statement (some call it a credit application) is taken and a credit bureau is pulled, the person who calls the credit (it may be the sales desk, the finance manager, the GSM, etc.) should look at the deal and make the determination as to whether or not they can comfortably spot the deal with a prime credit lender offering normal interest rates and no acquisition fees or discounts. If they can, the deal is worked as prime credit deal. If not, it goes sub-prime. Plain and simple.

Does that mean that there will occasionally be a deal that is miscalled? Of course it does. A higher credit score with a significant amount of negative equity, a high debt load or light credit history could easily turn in to a tough deal to work on the prime side. Conversely, a person with a low credit score but a good payment history on their previous car and home loans (especially with a captive finance company) may well wind up prime through the same or another captive. But, you know what? If you are going to make a rule, you have to focus on the norm, not the exceptions. So what if you mistakenly err on the side of the SF manager? Most likely the deal will be structured with the maximum front end gross. A deal worked prime that should have been sub-prime almost always will result in a reduced gross – if there is a deal at all.

While working with the aforementioned larger volume stores I was amazed to see the number of missed opportunities. They were seeing 400 to 600 and even more sub-prime credit opportunities each month in their stores. These were not leads or phone calls; they were warm bodies in the store. Yes, they were delivering a small percentage of them through their prime finance department, but easily less than a quarter of what they should have been converting, and at less than half of what their gross profits should have been.

Missing that many opportunities that come into a dealership in any market is a cardinal sin. This is one time that I can safely say that common sense should prevail. Draw the line based on the talent and the circumstances you have in the dealership. These customers need to get to the department that has the best opportunity to make them a deal, and get them there as early as possible.

And before you ask, that also involves the sales process and when the green balloon/red balloon qualifying must take place, but I said I wouldn’t go there this month. For now, just understand that no matter what, in Special Finance, the earlier you draw the line in the sand and get the deal to the SF manager, the better chance you have at satisfying the customer, delivering a vehicle and maximizing the gross profit on the deal. You must crawl before you walk and walk before you run. With a store missing even 400 opportunities in a month, even just crawling to that line can move the sales and gross profit needle substantially!

Have an opinion? Agree or disagree? If you do please feel free to e-mail me at [email protected].