BHPH on a Larger Scale
With the intention of providing software solutions for car dealers, he and colleague Rick Lye, who worked for the same dealer group in Canada, founded the company that would eventually become CarBiz USA, Inc. Their venture was successful; Ritter sold his dealerships, invested the money back into the company and moved the operation to Florida. Ritter said over time he and Lye began learning about BHPH and thought it was a great business model. They decided to migrate out of the software business in order to start their own BHPH operation.
The first CarBiz retail location opened in Palmetto, Fla., in 2003. When it did well, Ritter said, they decided to open a couple more, also in Southwest Florida. Those too were successful operations. Then in late 2007 the company experienced a huge growth spurt when CarBiz was able to acquire 23 new locations in the Midwest through its buyout of CalCars, thereby making CarBiz Auto Credit the fourth-largest chain of buy here pay here stores in the country.
That kind of expansion did not come without growing pains, however. “It sounds easy,” said Ritter, “but we … had a couple of bumps along the road.” The biggest bump in the road came last October when a hedge fund that had provided CarBiz with a $100 million-credit facility filed for bankruptcy. Overnight, their credit facility disappeared and the bankruptcy trustees asked for an immediate repayment of $43 million in debt. “The credit markets were just falling apart and it was probably the hardest time to ever raise capital or borrow money,” said Ritter. However, the setback was temporary thanks to the help of Dealer Services Corporation, through which CarBiz was able to obtain a new credit facility.
Presently, there are 25 CarBiz Auto Credit stores in nine states, divided into five geographic regions. With an employee force of 200, the stores sell a combined total of 400 to 500 cars each month.
Ritter noted that he refers to those 25 locations as “stores” rather than “dealerships” because the locations are simply retail facilities; there are no service or parts departments, only some reconditioning centers that operate as separate entities for the sole purpose of reconditioning CarBiz inventory. Most of the inventory is purchased at auction, and each of the five regions has its own buyer. The typical CarBiz vehicle retails for $12,000, is usually no older than five years and under 100,000 miles. The average amount spent on recon is around $600 per vehicle. “We do pretty aggressive reconditioning on the vehicle,” said Ritter, “because we all know if the car doesn’t run, the customer doesn’t pay.”
When an operation has 25 stores to manage, uniform processes and procedures are critical. “Obviously, with an operation this size, standardization becomes the most important thing. We need to know that every customer is being treated the same way,” said Ritter. “Every standard operating procedure is documented and written so that we have that uniformity. No matter what CarBiz store you go into, the experience should remain consistent.”
Since consistency and uniformity are so critical to the CarBiz business model, training is of paramount importance. “We have standardized policies and procedures for every possible scenario and that’s part of our training program,” said Ritter. There are four employment levels within the retail structure: associate (entry level), assistant manager, store manager and finally the regional manager, who oversees a group of stores based on geographic breakdown. Associates undergo what Ritter referred to as “unlock training,” which is done primarily by correspondence and with the assistance of the store manager. Testing is conducted over the phone by the consulting arm of CarBiz.
The managers’ training class (MTC) is a three-day program conducted at the training center in Sarasota, Fla., wherein store managers and regional managers are taught the entire business operation in different segments. Manager-level employees will attend the MTC many times because of the breadth of information and the frequency with which it is updated. There’s always a lot to learn, Ritter said, and through frequent and regular training “we have … a chain of command with a specific game plan to handle every customer consistently at every location, every time.”
The concepts of consistency and standardization go even deeper when it comes to underwriting. “We are not in the sales business,” he said. “We are in the underwriting and collection business … Good collections start with proper underwriting, and standardized underwriting is obviously critical, especially in the volume levels that we do.” Ritter explained that they not only use a “substantial” application with plenty of checks, balances and verifications, but they also utilize a specially-designed, computerized BHPH scorecard that breaks the deal into a customer stability component and a deal structure component. Between these two components, a customer must meet a certain score to qualify for a vehicle.
If the customer does not score well, it could simply mean the deal is not structured on the right car for that customer. The two-component model helps CarBiz personnel match customers with the right vehicles and put together deals that have the best chance for success, i.e., successful collections. “We have a very disciplined, precise program for providing credit to consumers, and it’s really based on honesty, their ability to pay and making sure we have the right deal structure for the right customer,” Ritter summarized.
He described the collections process employed by CarBiz as a “hybrid collection program.” It starts with a customer bringing their payment to the store where the car was purchased. “However,” Ritter continued, “store personnel are not professional collectors. They have collections policies and procedures, but they don’t have the skip-tracing tools and sophisticated collection tools that a large finance company needs for those harder-to-collect customers.” They do have the assistance of GPS and starter interrupts, which are installed on every vehicle sold, and protocols are in place to begin using those tools on the first day of delinquency.
If a customer gets past a certain delinquency point, the account is passed on to the centralized collection team based at the company’s headquarters in Sarasota. The team is made up of professional, full-time collectors who have all the skip-tracing tools and skills needed to track down the delinquent customer. Once they locate the customer, they will work toward a resolution. If the customer gets their account up to date, the account is transferred back to the location where the vehicle was purchased and normal payment collection resumes. If no resolution can be reached, the collection center can finalize the customer’s contract and repossess the vehicle.
However, repossession is certainly not the preferred method of resolution. “That is completely opposite to our customer philosophy,” Ritter stated. “The best way I can describe our program is as a program based on respect. We treat the customers with respect. We help them to become successful.” He explained that the primary goal is not to simply pursue and collect delinquent payments, but rather to address the reasons for the delinquency and proactively deal with the situation and keep the customer out of delinquency.
“We know and we expect that many of our customers will have challenges throughout the life of that loan and we have standardized, specific policies and procedures with how to deal with customers when those challenges come up in order to make them successful with their loans,” he said. The objective is to combine the right deal structure and underwriting with the right collection techniques and delinquency resolution to help a customer successfully pay off their car, trade it in and buy another.
Ensuring that customers are handled in the same manner and are treated well is especially important to the CarBiz retail chain. Maintaining a good reputation is critical because several stores are located in communities that could be considered more rural than metropolitan. In those kinds of communities, Ritter explained, there is a finite number of customers within that market area and many of them are repeat and referral customers. “If you damage that [customer] base with a bad reputation, frankly, you need to pick up and leave town and start over,” he said, “and we don’t see that as a long-term viable business plan.”
Ritter said their business plan for now is to simply focus on same-store sales growth for the next couple of years. “We see our operation right now with tons of potential for growth in same-store sales operations,” he said. “We see our current footprint as large enough to grow our business to probably twice the size it is in terms of sales without having to add one more store.”
As far as the BHPH industry in general goes, Ritter said the CarBiz Auto Credit stores, like many other BHPH operations, have seen a shift in who is considered to be the typical BHPH customer, with near-prime customers moving into subprime and subprime customers moving into the realm of BHPH. “I think it’ll be interesting to see what the new normal is going to be when this credit market shakeout ends,” said Ritter, “but I think we still have some time to go.”
Special Finance Insider Vol. 3, Issue 4