Compliance, Capital and Collections
To say the least, BHPH is in high demand today. More and more customers need alternative financing to replace the void left by several non-prime finance companies that have changed their programs over the past year. As the market continues to evolve, several dealers also are looking to BHPH or LHPH (lease here pay here) as a new source for sales and revenue. So, if you are a dealer who is thinking about financing subprime customers yourself, let me give you some words of advice. Just do it!
However, life as a BHPH dealer is not an easy road, and I don’t want to give any misconceptions. While it’s not rocket science, there’s plenty of margin for error. It can be the best business decision you ever make, especially today, but it can also be a nightmare. There are three areas of focus a dealer must master, regardless of the size of the operation—compliance, capital and collections.
Compliance – Compliance class is one you need to stay awake for, pay attention to and take good notes. There are a slew of state and federal laws and guidelines that can cost a small fortune if you’re caught violating just one, and any profitable, well-run operation can be shut down immediately with the stroke of a pen from an overeager auditor.
So, if you don’t have an attorney, get one. If you don’t have the knowledge of every law, regulation, procedure and guideline that affects BHPH operations in your state, go to class, do your homework and learn it. This is the one area of BHPH where there is absolutely NO margin for error.
Capital – There is plenty of advice around the industry today that a dealer should not consider BHPH unless they have at least $500,000 in working capital (also known as cash or cash flow). Well, I strongly disagree. I don’t see how a used car dealer can afford to do business without BHPH, even if it’s only one or two deals per month.
Don’t get me wrong. BHPH is expensive. So is the car business. You definitely have to budget your cash flow to fund loan originations, but whether that budget is $5,000 or $500,000 per month, you have to do it. I look at it as if I’m funding my own retirement plan. It’s a “mutual fund” where I fund the financing of customers’ vehicles, and they fund my future financial security. At the very least, it is a financial investment whereby I have complete control over the elements for success.
Now here’s the catch. Once you start funding deals, you have to stick to it. Month in and month out you have to keep funding and collecting deals with persistence and consistency. It is not an instant gratification program. In fact, you’re married to it from start to finish because it takes time to build a profitable portfolio, but three years of hard work and dedication will pay huge dividends on your investment.
Collections – BHPH gives you the freedom to sell more cars. You can choose to finance any customer who comes to your dealership. That’s the easy part; sticking to your underwriting guidelines is the hard part. Collections is where the work begins and ends, and it ultimately determines your success.
I’ve heard several colleagues throughout the years brag about the size of their loan portfolio. Many finance companies do the same, but a $500-million portfolio of receivables does not impress me. Instead, any subprime portfolio with less than 10 percent delinquent accounts, regardless of the size, is much more impressive. Now keep in mind, I define a delinquent account as any customer who is one day or one dollar past due.
There are three critical fundamentals for successful BHPH collections:
1. Margin – Regardless how you view a financed deal, there are always elements of risk. Unfortunately, over the past 20-plus years, we have developed a mindset where it has become second nature to finance people for more vehicle than they can afford. In BHPH, you must have enough discount margin to offset the risk.
If you predict that you will collect 75 percent of your accounts, your discount has to be 25 percent just to break even. That means your markup needs to be 125 percent of the cost of the vehicle being sold, including all taxes and fees, reconditioning, commissions and dealership profit. If you don’t build enough margin into your deal structure to cover expenses, profit and default risk, your portfolio will not succeed.
2. A Strong Close – Every deal needs a strong close for success. All BHPH customers need to fully understand the terms and conditions of their loans, as well as the expectations of their finance company. They must be informed how, when and where to make their payments and warned of the consequences of not making timely payments. This is where you set the tone for the entire relationship with the customer.
3. Constant Communication – Once the customer is on their way, it is vital that your collectors keep in constant communication in order to know what’s going on and to guide customers to success. Believe me; some customers need more guidance than others. The point is to stay in contact so you’ll know if anything is happening that affects their ability to pay, as well as the condition of the collateral.
BHPH can and will be a very profitable business venture, should you make the decision and fully commit yourself and your resources to the operation. If you focus on staying compliant, managing your capital, and prioritizing collections, your portfolio will grow exponentially over time, and your biggest headache will be managing growth.
Vol. 6 Issue 06