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The Five Basic Steps to a Special Finance Deal

There is an old saying in the car business: “Cash is King!” The foundations of guaranteed credit approval and guaranteed financing are based on the concept that the worse the credit, the higher the loan risk and the higher the down payment required to finance the deal. Cash down absolves all credit sins. Cash down is also your profit in special finance.
Sound simple? Yes! Is it believable? Yes! Is it true? Absolutely! Is it easy to do? No! If you focus on deal structure before ever presenting the deal to the bank or the customer, you will discover a pattern that will consistently lead to higher loan approvals, better closing percentages, more sales and higher gross profit.
There are five basic steps that will help keep your deals on track. Car dealers who follow these five steps consistently will be successful and maximize the gross profit on every deal, every time.

The five basic steps to the Special Finance deal:
  • Needs Analysis
  • Select the Vehicle
  • Structure the Deal 
  • Get the Approval
  • Present and Close the Deal

Step 1: Perform a thorough needs analysis. We learn in any basic sales class that the first objective in a sale is to establish rapport with the customer, followed by earning their trust as an expert who can and will help them. I perform needs analyses at our dealership and with all my clients to slow down the process and focus on learning the customer’s needs. It is an excellent tool for bypassing price and down payment questions, establishing rapport, and building trust with your customer.

The needs analysis is used to explain the methodical sales and finance process to the customer and is built around the three factors that affect purchasing decisions:

  • Economical: What can the customer afford?
  • Functional: What does the customer need in a vehicle?
  • Psychological: What does the customer want in a vehicle?

Once you understand these three factors, you can begin to understand your customer on a personal level and uncover all the hidden factors in their situation that will later play important roles that determine whether or not you make a profitable sale. The needs analysis also includes a complete customer statement (credit application), a credit inquiry and a quick credit decision by the desk manager or F&I manager. This credit decision will determine for which tier of financing the customer qualifies and must be accomplished accurately before moving on to Step 2, vehicle selection.

Step 2: Select the vehicle. The most common mistake with special finance deals occurs when the salesperson makes an attempt to sell a customer the first car that catches their eye on the lot. This is a sure recipe for failure that often results in frustration for both the sales staff and the customer, which is not good for business. The special finance dealer must take a proactive role helping the customer select the right vehicle early in the sale—one that fits their budget, needs and wants. Otherwise, you will waste a lot of time and energy trying to finance a vehicle that just won’t work, will embarrass your customer or will take a short money deal on a new age unit.

Today, vehicle selection means giving the customer the power to choose. You do so by controlling the list from which they choose. You must empower your customer with the freedom of choice and never try to force them into a vehicle they do not like. They simply have too many available options today for this old-school approach.  I recommend providing a list of three vehicle choices. Even if your customer is stuck on one particular car that may or may not work, you still provide two additional options that you are certain will work. Just remember to be patient because a prudent desk manager is always in control of the sale with the customer presentation.

Once the customer chooses the “right” vehicle for the deal, it’s now time for the sales team to go to work and make the customer feel like the most important person on earth during the demonstration drive. This is when the salesperson builds value in the vehicle and sets the tone for the customer to begin to take mental ownership. At this point in the sale, it’s the salesperson’s primary job to make the customer fall in love with the vehicle.

Step 3: Structure the deal. The most important step in the process for profitability is structuring the deal. Everything about the deal depends on a sound structure built on the right vehicle with the right lender. Typically when we car dealers submit a deal to the bank for approval, we maximize the amount financed and ask the bank for as much money as we think possible, expecting to negotiate downward. By doing so, we are making one of the most common and costly mistakes in finance.

Instead, each deal should be submitted to the lender for a payment call only or by keeping LTV (Loan to Value) low. For those banks that won’t give a payment call, submit the deal with a high price but also with a high down payment (25 percent to 40 percent) or submit the deal on a bogey vehicle that will later change. The key is to structure a deal whereby you ask the bank to finance no more than the trade value (a maximum of 100 percent LTV). The point is to get the approval first, then negotiate with the bank on the actual vehicle with the final structure. Too many deals never make it past submission to the banks due to system turndowns caused by a risky deal structure. 

Most lenders screen deals for approvals using an automated system with an internal scoring model to save both time and money. These automated systems will quickly decline deals that are structured incorrectly, thus limiting the options available to the credit manager (loan buyer at the bank) or even worse, preventing a dialogue between the buyer and your finance manager. Instead, get the approval first, then negotiate (rehash) with the bank. Finance managers who don’t understand this concept are costing dealers a fortune and giving too many good deals to the competition.

Deal structure determines profit. Deal structure dictates loan risk. Deal structure will make or break the deal, and the cardinal law of deal structure is affordability. Can the customer afford the payment? Can the bank afford the risk? Can the dealer afford the profit margin?

Step 4: Get the approval. The days of asking for the moon and shotgunning deals everywhere just trying to see what sticks are over. To be effective today, finance managers must thoroughly understand the programs and underwriting guidelines for each lender with whom they do business and structure and submit deals accordingly and consistently. Look-to-book and deal-capture ratios are key elements for success, and these lenders are your business partners who need to earn a profit, too. The goal is for your finance manager to discuss each and every deal with the credit manager at the bank. Business is done by people and through relationships; a professional dialogue between the dealership and the bank is important for business and key to increasing your loan approvals.

The risk meter for the bank is loan to value (LTV), how much money the bank is lending in relationship to the book value of the vehicle. A high LTV is a high risk for the bank, so loan approvals are inversely proportional to LTV. As you lower the LTV, you are actually increasing the likelihood of an approval by decreasing the risk of the loan. Debt to income (DTI) and payment to income (PTI) are also ratios that the bank uses. DTI and PTI determine if the customer can actually afford the vehicle. This is why proof of income is so important for special finance deals. Together, these three ratios determine the amount of risk for the bank and whether or not your customer gets an approval. It’s how banks compete.

Step 5: Present and close the deal. You have your customers in front of you, and they’re in love with a vehicle that fits their budget, needs and wants. You’ve selected the best lender for their current situation and have a preliminary approval from the bank. Now, it’s time to present the deal to the customer. Don’t be shy. You need down payment to make the deal. You need down payment to earn a profit. So, don’t be weak! Ask for it. I recommend a good ole fashioned “Four Square Presentation.” It’s the best tool I’ve found for presenting numbers to customers, isolating objections and getting down payment.

You are not maximizing the gross profit on your special finance deals unless you are focused on structuring each and every deal on the right vehicle and with the right lender. So, if you’re not getting those “five pound” deals ($5,000 gross profit) that raise your monthly average, you’re probably leaving money on the table due to poor deal structure or putting your customer in the wrong vehicle.

The secret to maximizing gross profit in special finance is to minimize the risk of the loans, and you do so by effectively structuring the deal for both profit and performance. These five simple steps will help you every time. Special finance is simple, but it’s not easy. If it were easy, everyone would be doing it. There are no shortcuts and this segment, the largest in the car business, can be one of the most profitable if the financing is done correctly.

Vol 5, Issue 5



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