The concept is so very elementary that it’s astonishing that more dealers aren’t utilizing it already. Mind you, the version you are about to read is the simplified version that Joyner was willing to share with our readers. The set up and execution are much more complex but very effective.
Joyner starts with an evaluation on perspective dealers. “A dealer must undergo a background check first,” says Joyner. “I want to make sure any dealer that I work with is in great shape. This means a check with the State Attorney General for any complaints, the Better Business Bureau and a financial statement review.” Once a dealer clears those hurdles, Joyner is happy to help them meet their goals.
There are two important qualities that the dealer or general manager in charge must possess to make the program a success from the beginning:
Honesty in business practices
Fairness- Greed doesn’t work in this program
From there, you start with basic investing principals. Who doesn’t want to make money on their money? Take a look at your local bank savings or CD rates to see just how dismal some investing options currently are. Finding any investment with an acceptable return is difficult these days, but investors’ eyes light up when you mention a low risk investment that has a return of 16 to 18 percent. So how does this connect with the dealer who needs cash?
Joyner connects the two by helping the dealer find that barrel of money he needs to meet his goals. Who in the dealer’s community has disposable income to invest? Doctors, lawyers, accountants, stockbrokers and other business owners. Now, what can happen if those individuals form a corporation for the sole purpose of purchasing retail installment contracts?
According to Joyner, a minimum of $300,000 is needed to properly set up the new corporation and is usually very attainable within the dealers own community. Once the new corporation is funded, business can begin.
Business can mean starting from scratch in the BHPH industry, or it means continuing to conduct business as usual, making sound underwriting decisions while delivering vehicles. The difference is instead of utilizing the dealer’s funds, the dealer calls the finance company, formed by the local investors, and informs them of the sale. The dealer doesn’t have to wait on their approval; he makes his own credit decision. Upon providing the finance company with all the proper documentation, the finance company delivers a check to the dealership just as any finance company would do.
The investors of the newly formed finance company rarely want to chase collections of the retail installment contracts they have purchased, so an agreement is usually reached between the dealer and the finance company which pays the dealer a fee to collect the accounts.
The dealer having made his typical front end profit of $2,000 to $2,500, then earns an 8 to 10 percent collection fee on all payments collected. As long as the dealer is collecting money, he is adding profit to his bottom line. This incentive, as well as the fact that all loans are full recourse, keeps the dealer focused on collections.
Full recourse protects the investors, allowing even the somewhat skeptical investor to feel secure. If at any time the buyer defaults on the contract, the dealer must pay the entire outstanding principal balance back to the finance company. If the dealer must repossess the vehicle, 80 percent of them are cleaned, serviced and resold.
Repossessions typically run 25 to 30 percent on all accounts. Word spreads quickly once investors start seeing positive returns on their money. According to Joyner, in 2004, more than $9 million of contracts were funded in this manner.
Obviously the return for the investors may vary depending on state maximum interest rates and the fees agreed upon with the dealer. All dealers are encouraged to consult their attorney to ensure all paperwork complies with individual state and federal regulations.
This innovative approach to finding funding for beginning a BHPH operation or expanding a current BHPH operation has caught the attention of many franchise and independent dealers alike. Is your next funding source right there in your own backyard?
Vol 2, Issue 10