At year end, it is common for people with investments to review their portfolios for possible reallocation of resources in an effort to continue growth and remain constant with current goals (i.e. 401k need reshuffling? Moving more stocks into bonds?). There is little difference between that and a dealer reviewing their “portfolio of lenders” to assure that their dealership’s selections are consistent with both their customers needs and the dealerships sales goals. The automotive industry focuses on sold units - their average gross, average finance profit and volume. Rarely however, are deals that a dealer could not finance tallied up at the end of the month to see how much actual gross profit was lost. These deals, with an additional lending resource, may have been converted to sales and ultimately gross profit. How often do you or your General Manager meet with your finance staff to review turndowns to see if there are constants to the type of deals that are routinely lost? Sometimes a dealership’s geographic location may determine specific attributes of deals that are common yet not acceptable to certain finance companies. As an example, many finance companies require computerized pay stubs. If you are located within a high “casual labor” market and your finance companies are not accustomed to non-traditional proof of income documentation you may need to consider finding one that understands, accepts and finances those customers. In the last year, there have been several changes in many financing policies including raising minimum incomes and credit scores. These changes have caused more turndowns.
Another typical challenge dealers’ face is financing used cars for nontraditional customers or financing for nontraditional vehicles. In a time of reduced manufacturer incentives and higher interest rates, it is possible that credit standards will get even tighter. Higher interest rates will also make it more difficult for customers to qualify for extensions of credit.
Dealers may need to shift inventory to older or higher mileage vehicles and this may not conform to the appetite of your existing lenders. To compensate, dealers should consider adding a finance source that has higher threshold limitations for mileage and accepts a lower credit score customer. This type of transaction typically requires more work on the part of the dealer. Some dealers are resistant to work these customers. As the environment continues to change, more dealers will want to convert these previously turned down customers into sales to maintain gross profits or to facilitate growth.
Additionally, as finance companies’ requirements change, dealers may be predisposed to consider more Buy Here Pay Here financing. While this may seem like a great source of additional gross profit and income, dealers need to seriously consider how this decision would affect their cash flow. The typical impact of “BHPH” transactions in which the dealer does not secure all of their costs up front is negative cash. With higher vehicle costs and a relatively static customer down payment, the dealer then experiences growing negative cash flow as his business grows. The ancillary result of BHPH financing on cash flow could leave a dealer unable to stock inventory to grow sales without incurring significant additional floor plan expenses.
As dealers’ review their typical turned down deals in an effort to capture more sales and gross profit, they need finance resources that have a “deal construction” philosophy versus a strict credit scoring philosophy. Dealers need finance companies that consider alternative income sources, older and higher mileage vehicles and even programs that return their working capital for the BHPH deal while allowing them to share in the “stream of payments.”
The market is challenging for the retail dealer today and “business as usual” won’t be good enough for those that desire to grow. What are you doing to add additional finance sources for your staff? Are you and your team willing to do the extra work on the more challenging deal to make the additional gross profit?
Reviewing your own “portfolio of lenders” on an ongoing basis, after reviewing your turned down deals, should be as common as your annual investment portfolio “checkup”.
