Improper Deal Structure Can Make it Seem Like Finance Companies Aren't Buying

I recently attended the 2010 NAF convention in Fort Worth, Texas. As always it was a very informative event; it’s the best place each year to meet and talk openly with the executives from most of the top auto finance companies.

The mood of this year’s event was the antithesis of 2009. While still somewhat guarded about the total outlook of the economy, capital is available. Every finance company I met with is extremely satisfied with their earnings in 2009 and is projecting solid growth for the upcoming 12 months.

Additionally, based on the information I obtained (but promised to not yet disclose), by the time you read this article some significant and positive changes should have been announced by a couple of the big auto finance companies. So all is good in the dealer world, right?

Not quite. I must say that with one significant exception (an elite SF dealership), the dealers present at the conference weren’t as rosy about their SF business. Everyone on the dealer panel that addressed the convention reported that they were struggling with their SF business and complained in particular that the combination of reduced finance company advances and increased acquisition fees left it impossible to make deals with any reasonable gross profit. One dealer on the panel reported that his store had previously done about 50 SF units per month but volume had dropped to just a third of what it had been. A finance director of AutoNation who manages about 100 finance managers for their company reported similar issues.

I am sorry; I am not biting on this. I work with many dealerships across the country, and yes, the business is more difficult than it was in 2006 and 2007, which was probably the most reckless time period I have ever seen in the SF industry. The financing climate now resembles what it was in the late ‘90s, in my opinion. Advances and credit terms are similar to those in that period, and then (like now) dealers were able to structure deals that yielded nice gross profits. Do dealers have to work leads now to achieve that same success they did three to four years ago? Absolutely, but that is what good SF managers and desk managers get paid to do.

I have written for years about Green and Red Balloons, the metaphor for identifying the creditworthiness of dealership customers. Nothing has changed about the need to identify creditworthiness quickly and effectively when a customer first contacts your dealership (whether in person, on the phone or online), except for the fact that it has become more urgent to do so.

With the terms and approvals being offered by the finance companies, deals are there to be made. When finance companies are looking to make loans and dealers are not able to make deals, one of three situations is occurring: the customer has been landed on the wrong vehicle (too expensive, not enough book, too many miles), their selling price is too low (based on a prime credit competition or Internet pricing), or they are not asking for money down—all of which point to a poorly-structured deal.

While many effective inventory tools have made their way into the dealer’s arsenal – complete with pricing philosophies – I feel that the average dealer, even one versed in SF, has become lax on the process that allows a salesperson or sales manager to quickly identify a SF credit customer before they are shown a vehicle.

Over the past 18 months, many dealers and managers became convinced that a SF deal couldn’t be put together. As a result, their focus shifted and they simply became less concerned about properly qualifying customers (if at all possible) before they sold a vehicle. More than ever, I am seeing deals written up and just thrown into F&I hoping something will stick.

Additionally, during the downturn there was significant downsizing in dealerships in order to weather the storm. Dealerships employed fewer people and asked them to wear more hats, and in some cases the employees either were ill-trained for the jobs they were asked to perform or had insufficient time to perform them properly. As a result, corners were cut and bad habits formed, with the result being poorly-structured deals on SF credit customers.

Yes, I will agree the reduction in rental fleets and off-lease vehicles makes buying SF inventory difficult, but I have certainly seen this before. Since I entered the SF industry over 20 years ago, there have been similar times when sourcing used inventory was a challenge. Then, like now, savvy dealers found a way to buy even hundreds of units per month that booked well, were desirable, and were at a price point that kept customers’ payment-to-income ratios in line.

Additionally, while inventory tools allow for easy, efficient and nearly-automatic posting online, there is no regulation requiring a dealer to post their entire inventory online. If you buy inventory specifically for SF, you can simply leave it off the Internet, so that you don’t box yourself into unworkable deal structures. Sure, you can absolutely sell it to regular retail customers, but most dealers will see little benefit in pricing every Chevy Impala or Nissan Altima with prime credit pricing models.

In summary, SF deals are definitely being done, and even more will be as all the companies are ramping back up for growth. Whether you are able to take advantage of the market will be dependent on proper deal structure, and that begins with a process to identify the SF customer before they are sold a vehicle. You want more SF deals at better gross profits? Find that balloon kiosk (figuratively) to help your sales team accomplish that task and you will be amazed at the results.

Vol. 7, Issue 7