Special Finance Companies: Navigating the Changing Seas of Auto Finance

In our April issue, Auto Dealer Monthly’s Dealers’ Choice Awards once again listed the top-ranked (by dealers) companies in subprime auto finance. With that, I don’t feel compelled to write an article about which companies a dealer or department should be using. Instead, I will offer some advice on how to better use the companies you already have on board, and perhaps suggest market segments you may want to take a second look at.

I have said for over two decades, the finance companies serving the SF market are like the sea. You have ebb tides and flow tides. There are times when you are riding a wave and times when you are in the trough. In simple terms, today’s hero can be tomorrow’s zero and come back to be a hero again in the future.

A great example of that is AmeriCredit. Back in the mid-2000s they were on top of the wave in a flow tide. In 2009, they rode the wave into a pile of rocks and nearly didn’t make it. Today, now owned by General Motors, the company is stronger than ever. Consumer Portfolio Services and United Auto Credit are two more companies that have similar stories. 

I always remind dealers and managers that relationships with SF companies are more important than ever. With most companies, the relationship the dealership holds with the buyer and the funder are critical. Those relationships can often get edgy deals approved, and deals with “gray” stips funded. Like all relationships, they take work and shouldn’t be taken lightly. Never write off a finance company just because it experiences a dry period of approvals or advances.

Additionally, dealers must understand life is a two-way street. From a dealer’s perspective, the most important factors may be the amount of advance being offered (often thought as never enough), the fees being charged, or how long it will take to get a contract funded. Finance companies, on the other hand, are looking at portfolio performance and, for some, performance ratios. It is important for a dealership and its management team to understand the important aspects of the relationship and manage their submissions and deals accordingly. In general, most SF companies are cognizant of dealers’ needs and try to stay as flexible as prudent business practices will allow.

I know quite a few high-volume SF dealers who have regularly-scheduled meetings to discuss the performance of their portfolios with top management team members of their key finance companies. Additionally, they counsel their employees to structure deals that make sense and to be careful not to set the customer up for failure. Finally, while being under no contractual obligation to do so, they go so far as to buy back first payment defaults to ensure that their portfolios perform well. As you can imagine, if those dealers need a favor done, it happens.

You should also remember that finance company credit analysts and funding clerks are no different than your own employees. In spite of what it may occasionally feel like, they are people and certainly have feelings too. Like anyone else, they hate to feel taken for granted and hate always feeling as though terse dealership personnel are shoving deals down their throat. 

Like you, they too want to be able to do their jobs as simply and easily as possible. Credit analysts (buyers) want to be able to trust that the information being submitted is accurate and complete. Yes, this may be stating the obvious, but when a deal is delayed when initial funding information cannot be verified, dealership personnel often fail to remember that.

Finally, I personally know that an occasional pizza sent in at lunch or a box of Mrs. Fields cookies delivered to a funding clerk(s) can grease the skids to get your dealership’s deals moved to the top of the funding pile. Relationships count!

The Next Great Finance Company
Did I get your attention? Yes, new finance companies with significant programs do appear from time to time. More often than not, it is a company that started regionally, proved its business model successful and, now with increased capital backing, is ready to take on a national scope. Sometimes they are the real deal. Then again, I have seen many flashes in the pan.

I don’t care if you are a franchise or independent dealer, whether you are funding a handful of SF deals each month or hundreds, if you have numerous finance companies at your avail or are struggling to add the second or third—appreciate those that you do have. Yes, companies appearing on the scene like Centrix Financial did 10 years ago can often add $500 to $1,000 a deal in additional gross profit to your SF operation, however, for the most part, no company can outperform the other companies for an extended period of time. Instead, they become the next statistic. Be realistic, and keep your eyes open and your ear to the ground. Use the tools and the networks available to you in order to stay abreast of your market.

Niches for Incremental Business Gains
There are many niches in the special finance business that are passed over in markets, even by the very successful SF dealerships. They require some specialized finance companies and, for some, special processes or disciplines, but are always worth the effort!

One market that many departments ignore is the open Chapter 7 bankruptcies. This is a segment that returned to strength following the bankruptcy reform law that went into place October 2005. There are several finance companies serving this niche, such as Prestige Financial, Tidewater Motor Credit, Friendly Finance, Consumer Portfolio Services and others. This niche has been around for years, with some dealers selling upwards of 30 per month.

Are you near a military base? If so, that is a niche you need to be able to serve well. You should check out finance companies such as Dealers’ Financial Services or Security National Auto Acceptance Corporation (SNAAC), among others. Both deal with independents as well as franchise dealers.

Other niches include open Chapter 13 bankruptcies and first-time buyers. Both niches have a number of strong options that are just often overlooked. All these niches can each add a number of extra deals per month to virtually any SF dealer, which can mean tens of thousands of dollars of extra gross profit.

Now, my last words of warning. I have known many dealers and/or SF managers who have become obsessed, spending every available minute looking for that next great finance company. Be mindful of your existing relationships. Spend more of your available time with your existing finance companies to learn their nuances and maximize those relationships. The grass is seldom greener, and as I said at the beginning, today’s hero can be tomorrow’s zero.

Dealers and managers need to look back at how excited they were to add each of the finance companies that they currently have on board. Each time a new company was added, dealers anticipated great new opportunities. In most cases, those opportunities are still there; the SF manager just has to remember where (or how to) find them.

Vol. 9, Issue 5