The two keys to buy here pay here are risk management and cash management. Both, as always, are hot topics, even more so now. Cash – either the availability or the management of – seems to be on everyone’s mind. The lack of either in some cases closing their doors.
Availability of cash is definitely not as prevalent as this time last year. The good news is that it is still available in the BHPH industry unlike some of the other unfortunate industries. It’s just not as easy to find or secure, not to mention afford, since the rates we enjoyed a year ago no longer exist.
Local banks and credit unions currently appear to be the best sources for capital. The larger regional and national banks seem to be getting completely out of the car business. Local banks and credit unions have smaller organizational charts and usually less turnover within those charts, aiding to a more stable decision-making future.
The three necessities to securing a line with either of these sources are patience, persistence and preparation. The days of simply walking into a bank and securing a line of credit on a handshake and a promise to pay are long gone. Local banks and credit unions have learned from the mistakes of the bigger regional and national banks and become smarter and more sophisticated in their approval processes.
Patience is needed because the local bank or credit union will need a complete education on our industry. Believe it or not, not everyone is familiar with what we do and how we do it. In some cases, it can actually be hard to convince a bank to loan money to a business that will in turn extend credit to someone who has shown little ability to repay it. They need a K-through-12 education up front to make their decision and then continued education after the line is secured.
Persistence is needed because the days of lending institutions seeking out beneficiaries of their generosity have just about ended, especially to those dealing with the subprime clientele. BHPH dealers have to be willing to go door to door and sell their business to these institutions. In most cases, dealers will have to knock on more than one door, and once in the door, it will take persistence to convince them.
Preparation will be the determining factor for success, initially and in the future. Banks and credit unions have become more sophisticated in their decision-making, and BHPH dealers will have to be able to provide more sophisticated information to them. Pro formas, financial statements, and cash flow analysis are just a few examples of what will need to be provided initially to obtain a line and on an ongoing basis once a line is secured.
The key to maintaining a good relationship with a capital source is to provide them with as much information as possible in the beginning and then on a regular basis so they never have to ask for anything. Full and accurate disclosure is paramount. Put yourself on their side of the desk. What would you like to know if it was your money? In this instance, there really is no such thing as too much information.
Having all the access in the world to capital will be worthless unless you know how to manage it. In today’s tight credit market, BHPH dealers have to able to manage not only their credit lines, but cash in general. Not understanding how to manage available cash has closed more BHPH dealers’ doors than any other cause. It is that important.
The best tool to effectively manage cash is common sense. Don’t spend what you don’t have. Too many dealers feel the need to live the lifestyle. Success can breed contentment and contentment can breed laziness, which will usually lead to failure. A cash-flow model will help keep common sense at the forefront. The model can be very detailed or it can be simplified to cover the basic cash-in, cash-out categories. Either way, it should show a one-, three-, and possibly five-year analysis and should be updated at least annually or whenever the overall business model changes (e.g., adding a location, increase or decrease in ACV or a change in underwriting standards). The model should also be realistic, as wishful thinking serves no purpose.
Having the model is only the first step; having the discipline to manage it is the challenge. Without discipline, the dealer may as well have the “Sell some cars, collect some money” business plan and just hold on for dear life—a plan that is not used by the more successful BHPH dealers. The model should be looked at on a monthly basis and compared to actual performance. That way, adjustments can be made immediately.
Cash – the availability and the effective management of it – is king in our business. There are BHPH dealers who operate without the need of a credit line because they understand how to manage cash. Likewise, there are BHPH dealers who operate within credit lines effectively for the same reason.. However, there are too many dealers who are experiencing capital reductions and, in some cases, all-out line calls because they don’t understand how to manage cash.
Dealers must have patience, persistence, and preparation to obtain and secure cash, then the discipline to manage it. Having all this will help take a load off the mind and help keep the doors open.