The Essential Elements for Success in Buy Here, Pay Here Car Lot Industry
The housing market crisis and the worsening economic downturn may impact sales for franchise dealerships, but this may not necessarily be the case for “buy here, pay here” (BHPH) stores. According to Brent Carmichael, a consultant at NCM Associates BHPH 20 Group programs, this type of business is typically resilient to recessions.
While the mortgage crisis may have slightly lowered the credit scores of some BHPH (buy here pay here) buyers, there is still a consistent demand for their services regardless of economic conditions. One positive aspect of this business is its ability to thrive even in challenging economic circumstances.
However, being successful as a BHPH (buy here pay here) dealer requires specific skills that are not typically needed by traditional car dealerships, such as closely monitoring cash flow, ensuring timely collections, obtaining financing for high-risk buyers, and managing customer tendencies to miss payments.
While many dealers possess similar skills, the Buy Here Pay Here (BHPH) entrepreneur typically works alone without a safety net. One misstep can mean the end of the business. This is a crucial aspect to consider for new car dealers venturing into this market, which involves collections, risk, and receivables management, as highlighted by Carmichael.
An error often made by new car dealers entering the BHPH (buy here pay here) market is failing to differentiate between selling cars and handling a subprime finance portfolio, notes Ken Shilson, president and founder of the National Alliance of BHPH Dealers (NABD). Understanding and addressing this distinction to minimize risks is key to succeeding in the BHPH industry. Obtaining capital poses an increasing challenge, as lenders and banks are tightening their requirements for all credit levels.
Many financial institutions struggle to comprehend why businesses would want to lend to high-risk consumers. This difficulty in finding capital sources willing to purchase BHPH paper is compounded by the fact that advances on note balances have decreased from 60-65 percent to 50-55 percent and there have been adjustments in criteria related to vehicle age, mileage, and note duration, as explained by Rick Potter, president of CAR Financial Services.
Securitization may present challenges, but having payment-protection devices on assets can help mitigate risks in case buyers’ default, according to Bob Blackburn, vice president of sales for Auto Lending Network, a nationwide network of finance companies and dealerships specializing in assisting individuals with credit challenges.
The buy here, pay here market
The Buy Here Pay Here (BHPH) market is fragmented, with little to no consolidation occurring, unlike the franchised market. According to Carmichael, even the top five BHPH dealers account for only about five percent of overall used car sales.
The typical vehicle sold by BHPH (buy here pay here) dealers has a price tag of $10,000. The majority of buyers are male, aged 25 to 40, with an average tenure of nine to 12 months in their current job. Most of them re renters, earn an average monthly income of $2,000, and have credit scores in the 400s range. They tend to be focused on making payments above all else.
BHPH dealers typically make an average gross profit of $3,500 to $4,000 per deal, with an average vehicle cost of $4,900 including reconditioning. The average loan term is 34 months. A significant portion, around 85 percent, of the vehicles on BHPH lots are acquired from auctions, forcing dealers to seek inventory from increasingly greater distances.
On average, a vehicle remains unsold in inventory for about 70 to 75 days. Historically, about 30 percent of the deals made by BHPH dealers end up failing, leading to the need for repossession and the effort of locating and transporting the vehicles back to the lot.
A business focused on managing and monitoring the flow of cash
The Buy Here Pay Here (BHPH) industry relies heavily on cash flow. Managing and monitoring cash flow is crucial for success in this type of business. According to Carmichael, the key to running a successful BHPH business is to have a well-thought-out cash flow model. Understanding where the cash is coming from, how it is being used, and how it is being managed is essential.
Many people who enter this industry understands it requires a substantial amount of cash. Cash flow is distinct from net profit or what is shown on paper. It reflects the actual amount of money that is being pocketed.
Despite some BHPH (buy here pay here) dealers reporting good net profits and monthly earnings, they may still find themselves having to finance their business operations from their own pockets. Given the vital role cash flow plays in sustaining the business, BHPH dealers must closely monitor and manage it. The objective is to minimize cash outflows as much as possible.
The Buy Here Pay Here (BHPH) industry relies heavily on cash flow. Managing and monitoring cash flow is crucial for success in this type of business. According to Carmichael, the key to running a successful BHPH business is to have a well-thought-out cash flow model. Understanding where the cash is coming from, how it is being used, and how it is being managed is essential.
Many people who enter this industry understands it requires a substantial amount of cash. Cash flow is distinct from net profit or what is shown on paper. It reflects the actual amount of money that is being pocketed.
Despite some BHPH dealers reporting good net profits and monthly earnings, they may still find themselves having to finance their business operations from their own pockets. Given the vital role cash flow plays in sustaining the business, BHPH dealers must closely monitor and manage it. The objective is to minimize cash outflows as much as possible.
Several of these strategies can contribute to cost savings, allowing you to retain more money. While reducing rent may not be immediately feasible, cutting expenses related to transportation, inventory, and marketing can be implemented swiftly.
Underwriting is crucial
Many Buy Here Pay Here (BHPH) dealers tend to ignore assessing the financial risk of their buyers due to their challenging backgrounds. The BHPH market is highly competitive, leading dealers to relax underwriting standards to stay competitive. However, experts emphasize the importance of conducting underwriting, such as verifying employment and residence, even if it requires extra effort.
While it is common for people to do the minimum required, better underwriting is crucial, according to Jim Krueger from PayTeck. Dealers who conduct background checks on buyers, including verifying employment status, tenure, and credit scores, experience fewer issues with vehicle losses.
Underwriting guidelines for BHPH dealers, represented by the acronym CASH (Credit score, Ability to pay, Stability, History of credit), are also recommended. Experts like Mike Simon from Sekurus, Inc. highlight the changing landscape of assessing risk in the BHPH (buy here pay here) market, with credit scores losing their significance.
Simon points out that the recession has affected buyers’ ability to pay debts, leading to a shift in customer profiles. However, it is suggested that the credit dynamics could improve in the future, creating better customers for the BHPH industry amid economic challenges. In the short term, dealers may see a decrease in sales opportunities, requiring a more rigorous approach to underwriting to ensure successful collections.
Collectors continue to have work to complete
If underwriting is stringent, your debt collectors still have responsibilities to fulfill. Ensuring timely payments are received is crucial for maintaining cash flow. The quality of collections depends on the frequency of customer contact, proficiency in collecting debts, and effectiveness of repossessions. Simon highlights the importance of implementing technology in vehicles to guarantee payments for funding deals. There are two options available to enhance collections.
One option is outsourcing collection activities to a professional agency, which can reduce costs, enhance cash flow, and increase profitability by securing more payments. The second option involves installing a payment-protection device, such as a starter interruption, on all sold vehicles. Sekurus offers two types of interrupt devices, one requiring a monthly code input by the owner to start the vehicle, and the other GPS-based for tracking and easy repossession.
These tools can help dealers transform a traditional high delinquency rate into a current status, reducing losses significantly. While not a cure-all solution, these devices can drastically improve financial outcomes for dealers.
Dealers are advised to utilize this tool on all their vehicles, with the system allowing for easy monitoring of payments due and preventing vehicle start until payments are received. This approach can streamline collection processes and reduce the need for extensive collections staff. Krueger emphasizes the efficiency of this method in maintaining current collections.
Origins of funding
Currently, there are fewer financial resources available for the Buy Here Pay Here (BHPH) market compared to a few years ago. Initially, hedge funds viewed the BHPH market as a lucrative opportunity, but their lack of understanding about the market dynamics resulted in investments in portfolios that were destined to fail, as highlighted by Potter of CAR Financial Services.
The funds mistakenly believed they were investing in the customer’s ability to make payments, when in reality, they were investing in the dealers’ capabilities to implement effective policies, procedures, and deal structuring guidelines. Many of the portfolios consisted of vehicles with excessively high mileage and extended terms, leading to a high rate of defaults. The unrestricted access to capital that existed previously has now disappeared.
Consequently, financial sources today are imposing restrictions such as mileage limits of no more than 100,000 miles, vehicles that are less than 10 years old, and terms lasting around 30 months. Dealers are being compelled to rethink how they structure their deals to increase the likelihood of customers fulfilling the full term of the agreement.
This involves focusing on structuring deals for long-term success rather than just to secure funding. In the current market environment, BHPH dealers should consider demanding larger initial down payments and limiting terms to between 25 and 30 months to attract funding for their deals. While financial sources have become more stringent, they are still available for viable portfolios, despite a decline in wholesale prices for inventory.
Following the aftermath of Hurricane Katrina, wholesale prices surged due to the diminished supply of used vehicles, but the situation has since stabilized, resulting in lower prices. Dealers who have successfully navigated through challenges such as hedge fund failures and natural disasters are now better positioned, as there is less competition for vehicles in the five to eight-year age bracket.
Recently, an auction service indicated a significant inventory of vehicles aged between six to 10 years. The market has experienced a cycle of unrealistic deal structures influenced by inflated wholesale vehicle prices, causing many lenders to withdraw from the market due to inadequately structured deals that underperformed. Despite the current low cost of capital, its availability has reduced due to the exit of numerous funding sources from the market, according to Potter.
Marketing for your dealership
Independent dealers were quick to adopt digital marketing channels, such as the Internet. A recent profitability seminar organized by various online marketing leaders highlighted that independent dealers are the most active in utilizing online classified car advertisements. According to Bruce McHoul, CEO of Auto Up Link USA, marketing inventory online is the most effective way for independent dealers to reduce costs and reach potential buyers.
This digital approach is especially beneficial for Buy Here Pay Here (BHPH) dealers, as it allows them to showcase their vehicles affordably and even create streaming videos to engage buyers emotionally. Furthermore, industry experts debunk the notion that BHPH customers do not use computers, emphasizing the importance of online marketing tools for this demographic.
By leveraging digital marketing strategies, BHPH dealers can minimize advertising expenses, measure effectiveness, and establish a strong brand presence. As BHPH dealers increasingly rely on computer systems for data analysis, inventory management, and customer communication, integrating online marketing practices can significantly enhance their profitability in today’s competitive market. Embracing digital tools and prudent business strategies can help BHPH dealers mitigate risks and maximize returns on vehicle sales.
Professionals recommend that Buy Here Pay Here (BHPH) dealers incorporate the following business procedures:
- Embrace improved underwriting methods.
- Implement stricter collection procedures.
- Mandate the installation of payment protection mechanisms on all vehicles sold.
- -Utilize more efficient marketing strategies.
By utilizing these marketing resources, Buy Here Pay Here (BHPH) dealers can lower their marketing expenses. Additionally, tools like online advertising enable dealers to connect with customers in a cost-effective way, while also enhancing their store’s brand and improving post-sale communication to strengthen customer relationships.
VP Marketing is here to help you sell more cars. You must check out our programs that we have available that are designed to help you increase your sales and revenue. We can help your buy here pay here business.
