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”.
Vol 3, Issue 3