We are all in business for the gross profit, but dealers also want satisfied customers. They understand that these concepts aren’t mutually exclusive. At the end of the day, gross is what turns into net profit. To get customers motivated to buy, the deal has to work for their budget. Finally, the deal has to work for the finance company; it must be approvable and, hopefully, be collectable. Deals have to work for everyone or else the model cannot be sustained.

It is a pretty simple concept, right? If so, why is it that people struggle so mightily when structuring a special finance deal, especially in light of all the available technology today?

I love technology. Any time I can use technology as a tool to help speed up a task, I am all for it. Back when people were still using tin cans and string, I added ProMax to my dealerships’ special finance efforts. Now, more than 16 years later, between working with my clients and the vendors serving the special finance industry, I have now used most every type of desking software that exists.

While I chose ProMax for my own stores, I haven’t really found a terrible package. The bottom line is that they are tools, tools that must be used just like those your technicians use in your service department. Just because a tech has a tamale wagon full of tools doesn’t mean they know how to use them. Certainly, that is the case when it comes to desking software. Some of the best techs I know can do the job with half as many tools, and certainly, some of the best special finance managers I know, working with a 10-key pad and paper, can still outperform others working with the best software in the world.

While I love technology—and I wouldn’t have a special finance department without it now—I feel it is imperative to have a solid understanding of what you are trying to accomplish rather than just rely on a tool. Most any desking software worth its salt should quickly steer you to the best vehicle options to fit a particular customer (i.e., the most gross profit within a payment range). That is exactly what it is supposed to do. The problem is, if used improperly, while maxing out the front end of the deal, it may well lead to a dead end in F&I.

Let’s look at an example of what needs to happen.

Step 1: Qualifying
After reviewing the customer statement and credit information, you feel certain your buyer will qualify only through a finance company that will advance 115 percent of invoice or NADA trade value for the vehicle or 135 percent of the NADA trade, including tax, tags and after-sale products. Additionally, the finance company will cap the payment at no more than 15 percent of the buyer’s monthly income. This isn’t a problem if you are aware of it in advance, but if you have a customer sold on a vehicle and need to finance MSRP or more, you are obviously in big trouble.

Step 2: Determining monthly payment
We must determine the maximum monthly payment allowed by the finance company. We simply multiply the buyer’s monthly income—in this example, let’s say $2,600—by 15 percent, and we immediately know what the largest monthly payment can be, $390.

Step 3: Inventory
It is important to ensure the vehicles you suggest will work with both the buyer’s and the finance company’s budget. Don’t try to put a size 13 foot into a size 10 shoe. You want to select vehicles you are able to sell at full maximum gross profit as opposed to one where the finance company will cap the sale price due to advance or maximum-allowed monthly payment.

Here is where software can be such a big help, as it allows you to know which vehicles will—at full gross profit opportunity—fit into an applicable payment range. The buyers then will be directed to no more than the top three vehicles that either your calculations or your software indicate fit a customer’s budget.

Once the customer has selected a vehicle, the maximum advance available on that vehicle from the chosen finance company is determined by using the NADA book and multiplying the average trade value by 115 percent—the maximum allowed by the finance company in this example. Adding the available down payment to the maximum vehicle advance provides the maximum sale price available. This will give you the maximum vehicle gross profit that can be financed by this finance company. (Since this is the maximum allowed, you wouldn’t want to negotiate a deal resulting in a higher sale price, as you know in advance the finance company would not fund it.)

Finally, multiply the same book value by 135 percent. This amount will be the maximum amount that can be advanced for the entire deal. To determine how much room there is for back-end product, we subtract from this top figure the 115 percent amount, then any monies required to cover tax, title and tags, since we have to record a perfect lien. The remainder is the amount of money available to sell a service contract, GAP, credit life or any other back-end product.

Using this process, you now have structured a deal that when contracted will fall within the finance company’s guidelines and provide the maximum gross profit available on the deal. It also staves off the dangerous situation requiring you to bring the customer back to the dealership and recontract, which potentially leads to the deal coming undone … or worse.

Step 4: Down payment
When it comes to down payment, you simply must not be afraid to ask for it. The highest-grossing special finance dealers consistently average higher down payments. This is important because when working deals from the bottom up, down payments become additional gross profit. If you start a deal using the finance company’s minimum-required down payment to make a deal, it will be difficult to raise it during negotiations. As a result, you will be leaving significant gross profit on the table.

Step 5: The art of rehashing deals
This step involves good relationships with the finance company and the art of rehashing deals. Most finance companies have wiggle room which will give them some flexibility to help put deals together. Don’t be afraid to ask for a rate concession or reduced discounts on deals already approved, signed, sealed and delivered. Just keep in mind that “pigs get fat and hogs get slaughtered.” Don’t be too greedy.

Voilà, we have structured a perfect deal, right? Hmmm, let’s see. This example has certainly maximized the front-end gross profit. What about the back-end?

It depends on which vehicles were originally suggested. I often hear dealers complain that F&I gross profit is limited in special finance. To a degree I agree, particularly with Tier 4, or deep subprime, deals. But most often, the limitation is a poorly-structured deal. Using this same example, the maximum monthly payment allowed is $390.

Here is where the vehicle suggestions can go wrong. Putting some numbers to this example, we’ll say that the customer will qualify for a 66-month loan at 18 percent APR . For simplicity’s sake, the down payment equals the sales tax. That means, using the 115-percent and 135-percent multipliers, software might steer the special finance manager to a vehicle that has a NADA/KBB value of $14,000. Assuming, for now, that the dealership owned it for the book value that would mean they could sell it for $16,100 and earn a $2,100 gross profit on the vehicle. Alas, financing $16,100 would mean the monthly payment would be $386 (see line 5 of the chart), and there would be no room for selling any finance products.

An adept special finance manager knows if they back down on the price of the vehicle selected, they can fit the payment into a budget and still have room to offer the customer needed protection. While software might indicate the first vehicle was the better option, a skilled special finance manager would see a vehicle in inventory that had a NADA/KBB book value of $12,000 (again, owned by the dealership for the same). The multiplier would allow a $13,800 sale price, which translates to a $331 payment. This, of course, is only an $1,800 front-end gross, or $300 less than the first option (see line 3 of the chart).

But wait, there is more! The total deal multiplier allows for a total amount financed of $16,200, which yields a monthly payment of $388. This allows for up to $2,400 of back-end product to be sold. Assuming a product cost of $1,200, you have a total deal of $3,000—$1,800 on the front and $1,200 on the back—or $900 more than the deal some software might steer you to. More importantly, you have a deal that the customer will like—one in which he is protected against mechanical breakdowns while making loan payments—and a deal that fits the finance company’s payment-to-income ratios.

Everybody is a winner!

I would hate to go back to the Stone Age and give up technology, but when it comes to structuring a special finance deal, you can see how important it is to truly understand what needs to be accomplished beyond the numbers provided by software in order to maximize the dealership’s opportunity and still make both the customer and finance company come out winners as well. If you find your department struggling for gross profit, or even to get deals approved, try using these techniques, and you will start winning, too.

Until next month, great selling!

Vol. 9, Issue 8

About the author
Greg Goebel

Greg Goebel


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