|Finding financing for customers is more than a bit difficult these days. Experts are predicting an uptick in buy here pay here (BHPH) traffic and sales. Many claim there is no better time to enter the BHPH market. This market has not endured the sales turmoil of the traditional retail market.
Market conditions have a smaller impact on the BHPH dealer because their typical customer is already in a poor financial situation, usually earning $10 to $12 an hour. They have a monthly income of $1,600, but their expenses average $1,800 so they are always upside down. It’s as if they were born into a recession.
All of this is leading dealers who have traditionally shied away from BHPH to reconsider their position on the topic. However, dealers should be forewarned to not jump foolishly without some facts. BHPH is a cash-heavy business. You must have capital or access to it, and new capital is hard to come by right now. BHPH is also a collection-driven business that produces profits over time, not overnight.
First is the inventory. The average BHPH deal includes vehicles with a $5,000 ACV. How much of that inventory, that will reliably run for at least 33 months, can you buy?
Those in the BHPH market work hard to establish a solid network of sources for their inventory.
Do you understand delinquencies, contractual delinquencies, recency and how they all relate to one another? The most important is contractual delinquencies. You must have a system in place to allow you to carefully monitor these items. Concrete data, not gut feelings, allow dealers to make wise decisions.
Some dealers might be led to believe that tax season is the best time of the year for a BHPH operation; however, historical data paints a different story. Tax season, specifically February, is historically the month of sales that has the highest charge-off rate, even though it is likely to be the month with the highest down payments. The reason is simple. Dealers allow larger down payments to sway their otherwise-prudent underwriting decisions. Just because a buyer has $3,000 for a down payment doesn’t indicate any ability to make their payments. It just proves that they allowed the government to do what they couldn’t—save their money. You can’t equate down payment to the ability to pay.
To successfully run a BHPH operation you need to have a plan B and plan C in place for your capital needs. Many successful dealers have a line of credit that serves them well, but what happens when a bank board meets and determines that they no longer want your kind of business and they call your line? Capital is not always about expansion, but can be about minimizing disruptions to your business. You will need to develop ongoing relationships for access to capital.
Even if you have taken all of that into account, what makes a good BHPH dealer great is discipline in underwriting. You can’t allow a slow month (or year) to affect your decision-making and cause you to take on risk you don’t need in an attempt to get back on a growth track. Manage your cash and manage your underwriting.
Great BHPH dealers are disciplined underwriters. Have you got what it takes? Does your staff?
|Vol. 5 Issue 12
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.