The Re-Emergence of Special Finance
How Dealers are Capitalizing on the Comeback
Special finance is back!
Technically it never left; the customer base continued to grow even while finance sources pulled back so much that many dealers felt like special financing was gone forever. In some ways, special finance as we knew it is gone forever; advances of 140 percent plus, plus, plus for customers with damaged credit are no more. Gone are the days of untrained personnel hanging special finance paper without any real understanding of the proper deal structure and still holding gross profits. Gone are some special finance departments that weren’t fully committed to the process.
Special Finance expert Greg Goebel said, “The thinning of the special finance ranks was a painful process, but those who remain are stronger than ever. Those that are entering will have to be more committed to the entire process than ever. Special finance isn’t a half-hearted venture; you have to have all of the components in place to be successful in this market.”
There are dealers who dug in, hung on, expanded and even some who are entering the new era of special finance for the first time. Their perspectives are as varied as their operations, but they all see the potential.
Riding the Roller Coaster
"The ultimate goal is to try to build the department so we have all our stores funneling their SF traffic towards the departments."
- Dan Hrabovsky, SF
At Dave Hallman Chevrolet in Erie, Pa., SF Manager Brian Vergotz held on tightly as special finance at his store became a bumpy ride throughout the end of 2008 and 2009. “When everything started to fall down with the economy and we got slow [in October 2008] … at that point instead of doing 50 [SF deals] a month, I was doing 30,” he said. In December 2008, the department hit 19 SF deals. Then, in February 2009, the dealership sold 44 SF units, but went back down to 30 the following month. “It was kind of a roller coaster,” he acknowledged.
And it affected more than the dealership’s bottom line. “My pay plan is based on 30, 40 and 50 cars, so when you get down to doing 19, you’re not making any money at all.” Luckily for him, the dealership didn’t see too many back-to-back months where SF sales fell below 30. Besides October 08 through January 09 (when the dealership averaged 24 a month), there were only two other months when sales were under 30—September and October 2009.
However, 2010 has proved to be a better year. Through July, the dealership averaged almost 50 SF sales a month. “In , it seems like things are cruising back along,” said Vergotz. He attributes the dealership’s return to pre-recession levels to a few different factors.
One, he’s built his list of finance sources back up after losing several. At one point, his department was down to four or five finance sources to submit SF deals to, but now he’s signed up with 12. He proactively sought out new sources and the dealership has been picked back up by a few that dropped it during the recession.
Two, the finance sources he’s working with are “loosening their guidelines” a bit and are approving more deals. Two companies he specifically named were Capital One Auto Finance and AmeriCredit (now known as GM Financial).
Three, there’s not as much competition in today’s SF market. Vergotz said, “There are so many dealers that have quit, so I think I’ve gained some of that market share in our area. There’s only a couple of them in town that are really doing anything with [SF].”
He’s noticed some dealers coming back to SF, but he also mentioned a few dealers in his area who lost hundreds-of-thousands of dollars through their special finance departments. He doesn’t think dealers like that will ever get back into SF because they were “burned so bad.”
While all these things are helping Vergotz put more SF deals on the books for Dave Hallman Chevrolet, the one thing hindering the department is the cost of inventory. “The hard part is cars and trucks are so doggone expensive … Three years ago, $3,000 [front-end gross] was probably a good average [on a SF deal],” he said.
Nowadays, the dealership’s average front-end gross on a SF deal is about $1,900, which he aptly called a “pretty solid average.” He’s not far from the 2010 benchmark (representing the top 25 percent of dealers) for front-end gross on a SF deal, which is $2,166, according to Greg Goebel Training & Consulting data. “I’ll take a deal that’s $1,000 [front-end gross] … You have to take every deal that comes across your desk without greed because it’s going to turn into more deals,” Vergotz said, adding that he typically makes more money on a referral.
Referral and repeat business accounts for a large portion of Dave Hallman Chevrolet’s SF business, up to 50 percent some months. Also accounting for a large part of the dealership’s business are walk-ins, and a smaller percentage is from organic and third-party leads. While some dealers have sworn off paid leads because of low conversion, Vergotz is realistic of his expectations of leads. “It’s a huge funnel. You have to fill that funnel with a lot of junk to have some [workable leads] spew out the bottom.”
Aiming at a Moving Target
For independent dealers whose entire business model revolves around indirect special financing – like Ted Heater of CarSmart in Kansas City, Mo. – keeping up with the changing market has been a challenge, to say the least, but Heater adapted and finally found the solution to matching his pre-recession sales.
Prior to the down market, CarSmart was selling around 110 units a month, all of which are SF. In 2009, the dealership averaged around 60 to 65 a month, but in July, it sold 120 units, all of which were SF. The solution was working leads more efficiently by implementing a business development center. “Our traffic count [and] our leads have dramatically increased. At the first of the year, we implemented a BDC with four full-time and one part-time BDC employees and a manager. We’ve added sales staff. We’ve got a sales staff of 9 people now. We started to slowly increase inventory and advertising money too, so we’re trying to get back to the way things were pre-2009,” said Heater.
"There are a couple of lenders out there that are starting to poke and prod at the subprime accounts ... I do believe in the last four months they have loosened up."
- Spencer Walters, Finance Director
Antonino Auto Group
Approximately one-third of the dealership’s leads come from its website, GetCarSmart.com. Most customers learn about the website through the dealership’s traditional advertising. “We pound the URL through all of our advertisements,” he said. “We’ve even got a billboard up … at the north end of our dealership that just says GetCarSmart.com.”
Heater also drives traffic to the store through direct mailers. “Most of the direct mail we do is to previous customers,” he said. It’s sent out to people who have either come into the store or have submitted a lead online, but “for whatever reason we hadn’t had any sort of e-mail or phone conversation” with them. “It’s the largest size postcard that you can mail legally …. It’s just a message that says, ‘Hey, where are you? Where have you been?’ … It’s amazing that we look up every day and people … walk in with it.”
Obviously, when customers walk in with the mailer in hand, it makes that campaign easy to track. The BDC also helps Heater track all the leads the dealership gets, which was part of his goal when he implemented it. He wanted to better manage the leads coming into his store, and as the industry pros know, you can’t manage what you don’t measure.
Over the past two years, he’s been through a little trial and error while trying to figure out how to get sales back up over the 100-per-month mark. The dealership’s first foray online wasn’t until April 2009, which was obviously a good move considering the number of leads that come from GetCarSmart.com.
One experiment that didn’t produce the desired results for Heater was competing in the low-priced inventory game with the help of vAuto. He feels dealers can be successful and sell a ton of cars with the help of the information vAuto provides, but that didn’t work for his small independent store in the Kansas City market. “We experimented for almost six months with vAuto … In the Kansas City market, what I have found was that there were a few dealers that also used vAuto that were very aggressive with it. It became very, very competitive. You had a lot of dealers that were trying to buy the same type of inventory and trying to sell the same type of cars so it became cutthroat.” When using vAuto, Heater said CarSmart experienced “an uptick in numbers, but it didn’t correlate to any gross for us.” The “final straw” for him was when he realized he was getting more inquires from and selling more cars to “dealers across the country wanting to buy my inventory.”
He was in the retail business, and a shortage of retail customers wasn’t the problem. “We still had the same amount of customers that came in that wanted to buy and were special finance customers, but the problem was the availability of getting them financed. The banks had really scaled back.” However, at about the time he was seriously considering implementing a BDC, which was in the last quarter of 2009, he noticed “things were trying to pick up” in the subprime auto finance market.
He recalled, “It was kind of perfect timing when we implemented the BDC … We really kicked it off in January 2010, and we went from 67 cars in December to 104 in January and spent less money on advertising.” Throughout 2010, Heater signed up with a few new finance companies like Westlake Financial and Automotive Credit Corp. (ACC), although none of the companies that dropped him in the recession have picked him back up yet. He’s hopeful, however, that Capital One Auto Finance will. “We used to do 10 to 15 deals a month with them, and … they say that it’s their plan to start activating their independent dealer base sometime during 2010.”
His latest experiment is TedForThePeople.com, a new dealership website that is completely different than GetCarSmart.com. “The ‘Ted For The People’ site is more of a special finance site. It’s loaded with squeeze pages to generate leads. It’s information-driven … It’s a completely different animal.” It’s only been up and running since August, but it’s a site that – if successful – will generate a lot of leads for the dealership. Before viewing inventory, site visitors must submit a name, e-mail address and phone number.
“We’re going to track it to see how [both websites] perform and then kind of make a decision … keep the ‘Get Car Smart [site]’ active like we have, or switch it to the ‘Ted For the People [site].’ We’re going to track and see which one performs better,” said Heater.
Getting a Bigger Piece of the Pie
While Antonino Auto Group in Groton, Ct., has sold quite a few special finance units over the years between its nine stores, its business has gone from about 25 percent special finance to between 35 and 40 percent SF, said Spencer Walters, the finance director for Antonino and the president/owner of TheAutoRefinanceCenter.com.
That’s a pretty good percentage considering the state of Connecticut has a high average credit score, hovering around the 700 mark regardless of which credit reporting company’s data you analyze.
So while the subprime pie in Connecticut might not be as big as it is in states like Texas or Louisiana (both of which average significantly lower on the credit-score spectrum), Walters and Antonino Auto Group are still going after a bigger piece.
"We implemented a BDC with four full-time and one part-time BDC employees and a manager ... We're trying to get back to the way things were pre-2009."
- Ted Heater, Owner
Walters joined the Antonino team in early 2010, and the increase in special finance business could be attributed to a few different factors—finance companies
loosening their guidelines, relationships he’s cultivated with finance companies since he’s been there and a successful mail campaign targeting SF customers. “There are a couple of lenders out there that are starting to poke and prod at the subprime accounts, like Fifth Third … and US Bank … I do believe in the last four months they have loosened up, and I believe that they will continue to do so,” said Walters.
Walters has been in auto finance for eight years, so he’d already established good relationships with some finance companies
“I think now more than ever it’s really important to be not only honest with your lenders, but really create a strong, tight relationship … Antonio Auto Group has been doing that for years. That wasn’t anything I came in and changed. This group is very open and honest with their lenders, and that’s a very large reason why they are so successful in the subprime market.”
In addition to being honest and open with finance sources, he stressed the need for meticulous attention to detail and having all stips accounted for and in order before submitting a deal. Walters said, “You need to make sure you have your I’s dotted and T’s crossed … Before, things like missing POI could be overcome with a higher fee, or proof of residency could be forgiven.”
The subprime-focused direct mail campaign that’s also a SF sales generator for Antonino is “a very simple, tasteful, ‘We have the cars and the financing to get you the vehicle that you’re looking for’” mailer. He said the mailers emphasize messages like: “We’re here to help you out. Have you had a couple bumps in your credit? Don’t feel ashamed. Come into one of our Antonino Auto Group stores. We’d be more than happy to help get you back on track with a vehicle you can rely on.”
Also, the mailers include the name of an employee to ask for – one who’s trained in special finance – so customers don’t have to call or come into the dealership asking for the special finance department or declaring they saw a mailer for people with poor credit.
Among the Antonino stores, which sell anywhere between 45 and 130 total vehicles per month per store, each has about nine finance sources. Most of them have six sources that are in the subprime business. Typically, they’ll send out a 10,000-piece mail campaign directed at a specific geographic area, with similar mailers going out every six to eight weeks to the other market areas the group covers; that way they don’t saturate one group of customers with mailers. But in October, the group sent out a 50,000-piece mailer across all markets, so Walters said they’ll make sure to build in a little more lag time between the large mailer and a new wave of smaller campaigns.
The campaigns are relatively low-cost, with the 50,000-piece campaign costing less than $6,000. After a few sales, the campaign is paid for, which is a cinch considering the group sometimes sells 50 to 60 vehicles from the smaller campaigns.
It’s an added bonus that the Antonino Auto Group doesn’t have a ton of competition for the SF market. “In our market, there’s really not a lot of dealers that really see the value in the subprime market. Most of them just don’t want to deal with it because they think it’s extra work … and we’re happy to take [subprime customers] on,” said Walters.
Throwing Down the SF Gauntlet
Some dealerships are just now taking up the challenge of getting into the special finance business. Tri-Star Motors in Blairsville, Pa., is one such dealer. Dan Hrabovsky is building the dealership’s SF department, but not completely from scratch. The dealership did a couple of SF deals a month prior to his arrival in early 2010, but they “treaded very carefully,” as he put it.
The dealership – which encompasses Ford, Mercury, Dodge, Jeep, Chrysler, Kia and Suzuki franchises under one roof – clearly needed more subprime finance sources. “One of our first moves was to put the right lenders in … and steadily taking, adjusting and building processes to make sure that those SF deals go through.” Currently, the dealership has about a dozen subprime finance companies available to them.
"When everything started to fall down with the economy and we got slow [in October 2008] ... at that point instead of doing 50 [SF deals] a month, I was doing 30. ... In , it seems like things are cruising back along."
- Brian Vergotz, SF Manager
Dave Hallman Chevrolet
Changing processes, which is tough in any dealership or department, is a work in progress. The most important part of the process, said Hrabovsky, is the customer interview process. The goal is for salespeople to determine whether they’re working with a SF customer as early as possible, so he can meet with the customer and conduct the interview. He said the interview is integral to gaining the customer’s trust and “holding onto them as more of a committed customer than a random shopper.” He added, “It seems to be the right way to build the deal for the lender as well because I know the story behind anything.”
As soon as a salesperson knows he or she is dealing with a subprime customer, Hrabovsky will “go right in and, in essence, T.O. that deal.” He said more often than not, customers aren’t at the dealership long before they will let the salesperson know they have damaged credit. Then comes a credit application and the customer interview.
As for how SF sales are growing—so far, so good. “It’s been an incremental increase … Our first month was 11 or 12. Our second month was 13 or 14. July we wrote 18, and then this month [August], we’re on pace to track 20-plus … That’s really been the goal the whole time … to grow it incrementally.” The goal for now is to get up to 50 to 60 SF units a month, which would account for about a quarter of the dealership’s sales.
Tri-Star Motors encompasses a total of six stores, including the Blairsville store Hrabovsky works at, but his is the only one with a dedicated SF department. “The ultimate goal is to try to build the department sowe have all our stores funneling their SF traffic towards this department,” he said. And the goal is to accomplish that with the help of a blind SF website, PACarLoan.com.
“We’re doing everything we can to make PACarLoan a brand and drive traffic to PACarLoan.” He wants people in Pennsylvania with damaged credit to think of PACarLoan.com before anything else when they’re thinking about purchasing a vehicle. “The idea is for PACarLoan to be in essence almost like another franchise … for PACarLoan to be the brand and Tri-Star to be the dealership.” He estimated that currently, 50 to 70 percent of the dealership’s SF sales are from a credit application submitted on PACarLoan.com.
His attitude towards special finance is pragmatic and includes all parties—the customer, the finance company and the dealership’s relationships with both of them. “I think special finance is no different than anything else in car sales. If you do things the right way and you’re straightforward about the process with not only the lenders but with the customers, you grow not only a good reputation but also a steady increase [in SF sales].”
Hrabovsky explained, “From the customer standpoint, you see repeat [business and] referrals. From the lender standpoint, you see them possibly buy a little deeper because you’ve already established that trust level. And I guess that’s a big thing on both sides—trust.” He added that he looks at it this way: “If I was in this situation trying to purchase a vehicle, how would I want to be treated? And if I was the lender buying this loan, what information would I want to know?”
His approach recognizes the importance of maintaining harmony among all parties involved in special finance – the customer, the finance company and the dealership – which is important to the long-term success of any special finance department.
Vol. 7, Issue 11