You Do the BHPH Math

Many dealers I talk to are looking for the magic formula for success in the buy here pay here business. The fact is there are as many ways to be successful at BHPH as there are BHPH dealers! There isn’t just one business model that works. That’s the good news! The bad news is that the BHPH business is a tough business, and there are lots of ways to get yourself into serious trouble (legally and financially).

The importance of frequently attending education and training workshops cannot be overstated. The number of laws and regulations that apply to the BHPH business can seem overwhelming. Among those laws and regulations are Red Flags Rule, Fair Debt Collection Practices Act, privacy legislation, Truth in Lending legislation, Equal Credit Opportunity Act and Fair Credit Reporting Act. Aside from knowing the details of the laws or regulations, the next most important thing you should know are the fines and penalties that apply if you are found guilty of a violation. Some penalties can include the loss of your business and prison time! It’s not an area of your business that you should take lightly.

For anyone who is currently or considering getting started in the BHPH business, a critical first step is to complete a formal cash flow analysis based on your specific business model. It is important to know how much capital your business model will require on a yearly basis, how many accounts you will need to become cash flow positive and how long it will take to recover your investment.

A formal cash flow analysis should take into consideration important variables such as vehicle cost, monthly sales volume, average down payment, loan interest rate, term, average delinquency rate, average charge-off expense, recovered loss rate, startup costs, staff expense, overhead expense, projected growth rate and several other variables. The time you invest in a formal cash flow analysis could be the difference between success and failure.

I said earlier that the BHPH business is a tough business, and it is, but it can also be a very lucrative business if it’s done correctly. Successful BHPH operators have historically generated profits of 15 to 20 percent of revenues. There are several key factors that contribute to success and profitability in a BHPH business. One of the most important factors to success is having sufficient capital to operate and sustain your business. However, securing capital to fund your business without developing effective policies and procedures to manage deal structure, underwriting and collections will probably put you out of business just as quickly.

We continue to see record levels of unemployment, home foreclosures and bankruptcy filings, which have resulted in damaged credit ratings and reduced borrowing capacity for many people. However, the best BHPH operators continue to thrive and be profitable in this economy. Even with the many challenges associated with operating a BHPH business in a difficult economy, this is still one of the best times to be in the BHPH business.

Recently, CNW Research analyst Art Spinella said tough economic times are dramatically driving up the growth of buy here pay here car lots throughout the country. "In CY 2009, more than 1.8 million BHPH cars and trucks were sold and the 2010 projections (based on the first-quarter data) could see BHPH top 2.3 million units.”

If there is one “magic formula” for success in the BHPH business, it has to do with understanding your business results and analyzing your numbers. One of the smartest decisions you could make is to join a BHPH performance group, traditionally called a 20 group. Performance groups are comprised of non-competing BHPH dealers from around the country that participate in a monthly conference call hosted by a professional moderator. Member dealers exchange ideas, best practices and innovative thinking to achieve greater profitability in their business. Performance groups focus on specific business issues that are unique to the cash-intensive requirements of a BHPH operation.

In conclusion, tough times and a tough business really do equal opportunity in the BHPH business, provided you have sufficient capital and sound policies and procedures at the foundation of your business. You do the math!

Vol. 7, Issue 10