Is This the Time to be in Buy Here Pay Here?

Many dealers who lost their new car franchises this past year are contemplating what their next move is. In May 2009, General Motors announced it would eliminate roughly 1,100 dealers, and Chrysler followed that by announcing it would eliminate more than 700 dealers. For those of us who have been around the car business for a long time, that was very sobering news, and for the dealers who lost their franchises, it was very unfortunate news. If that wasn’t a strong enough blow to the car business, the meltdown in the subprime finance market, combined with record levels of unemployment, housing foreclosures and bankruptcy filings, have made this one of the most difficult economic times since the Great Depression.

If you are a new car dealer struggling with questions about what to do after losing your franchise or you are a subprime dealer unable to get your deals bought and are forced to turn away customers, you may be wondering: is this the time to be in the buy here pay here business? My advice is that you should do your homework before you answer that question!

While many dealers may think that moving into the BHPH business is a natural progression from operating a new car dealership or a subprime business, I can assure you that it is anything but! The first major difference is that the BHPH business is the finance business—not the car business as you know it. In BHPH, you are the bank, and you approve the loans to credit-challenged people. The second major difference is that the BHPH business is the collections business—not the sales business. It is not a difficult process to initiate new loans to customers who might have been turned down at every dealership they’ve applied to for credit. Collecting on those loans effectively is not merely one of the keys to success in buy here pay here; it alone can be the difference between success and failure in this business!

In spite of those rather daunting realities, the BHPH business can still be a very lucrative business—if it’s done right. Even the most profitable new car franchise operators struggle to generate bottom-line profits equal to two to three percent of revenues. In comparison, successful BHPH businesses have historically generated profits of 15 to 20 percent of revenues!

One of the most important steps to evaluate before entering the BHPH business is the amount of capital required to fund your business model. I strongly recommend that you do a formal cash flow analysis of your specific business model to determine your capital requirements, how many active accounts you need to turn cash positive, and how long it will take to turn cash positive.

Another important step before entering the BHPH business is to establish formal policies and procedures to guide and direct the management of your BHPH business. You will need specific policies on key operational components such as inventory, deal structure and underwriting. You will need specific procedures on volatile issues like delinquency, repossessions and charge-offs. You will also need good dealer management software to accurately record and report your business results.

The companies that provide capital to fund BHPH businesses will require detailed analyses of your business performance in key areas such as principal payments, collection rates, charge-offs, recovered loss, and other important metrics. I also recommend you join a performance analysis group specific to the BHPH industry to analyze your business results and compare your performance to other BHPH dealers across the country. A performance analysis group will not only provide a gauge for measuring your business, but it will also provide a valuable networking opportunity with other BHPH dealers from around the country.

Don’t underestimate the importance of being well prepared before you enter the buy here pay here business. There are many dealer education and training opportunities available at both the national and state levels. Conventions provide excellent opportunities to learn from top performers in the industry. By participating in the trade shows at these conventions, you can find resources for any area of your business.

The good news is that even in this difficult economy, many BHPH dealers are thriving and making great money. The bad news is that cash flow, access to capital, repossessions and charge-offs continue to be real challenges. The degree to which you can successfully manage your cash flow, deal structure, underwriting and collections in a BHPH business will ultimately determine if this really is the time to be in the BHPH business!