There would be problems since it was an infant industry. In the “old days” (when I started), CAC’s advance was heavily discounted; many would say it still is today. Back then, the advance on a contract was equal to 150 percent of the customer’s down payment. If the customer had $1,000 down, the advance was $1,500. After netting out the taxes and registration fees, dealers were forced to sell very inexpensive vehicles to be able to have any front-end profit at the time of sale.
The easy way for a new-start company to gain market share was to offer greater advances – and that they did. Through the mid-90s dealers saw some really aggressive programs as new companies entered the market. More and more companies would enter the market, and to capture share, they relaxed underwriting guidelines. Then, customers who had never paid attention, let alone paid their debts, were being advanced money at nearly prime credit levels.
The predictable happened. Dealers saw a gravy-train and loaded the companies with business. Dealers were also heavy handed. Many boldly advised the finance companies that they had to step up to earn the dealer’s business.
Then the companies started hitting the wall. Goshen, Aegis, AMN, Western Fidelity Funding Inc., Tranex, Consumer Acceptance, General Acceptance, Fairlane, Universal Underwriters Acceptance Corporation, Banc Financial and most recently, Centrix Financial all went belly-up or suspended underwriting. Mercury Finance filed for bankruptcy protection. Then there was Jayhawk Acceptance Corporation. After failing in the sub prime credit sector, they switched gears to try to save the company and financed elective cosmetic surgery!? There are countless others, but my memory is blurred by the passage of time and their sheer numbers. Needless to say, dealers who were scarred by unfunded contracts after delivering cars on approved contracts through suddenly out-of-business companies certainly can remember them.
Advance forward from the mid-90s to today. It is a much different landscape, and dealers and their SF managers must understand that. After the very predictable thinning of the landscape through failures, mergers and buyouts, the numbers of finance companies available in the marketplace have shrunk considerably. Additionally, the “silly” programs that were being offered have disappeared, for the most part. With good actuarial performance metrics in a maturing industry, it is much easier for the companies to know where they must draw the line to remain not only viable, but profitable.
Today, the strong SF dealers truly understand that it is a partnership. Dealers want consistent and long-term sources to place their secondary-credit customers. They want quick turnaround for funding these deals. Make no mistake, there are many SF managers that still expect a 150 percent advance on retail book for a 379 FICO score with three weeks on the job, but the dealer understands why that can’t be. Dealers are cognizant of how their paper is performing, as they don’t want to lose the use of valuable resources that help them add some times millions of dollars of gross profit to their financial statement each year. It is a much more realistic and mature environment on both sides.
Relationships are more important now than ever with SF companies. The relationship the dealership holds with the buyer and the finance company are critical. Those relationships will sometimes get edgy deals approved and deals with stips in the gray area funded.
These relationships should not be taken lightly. One of the things I continually remind dealers of is to not let their F&I or SF manager write off a finance company just because they experience a dry period of approvals or advances. The Special Finance company environment is like the sea. You have ebb tides and flow tides. There are times when you are riding a wave and times when you are in the trough. Simply put, today’s hero can be tomorrow’s zero and come back to rise as a hero again.
A great example of that is AmeriCredit Corporation. In the late 90s and early 2000s, they were on top of the wave. In early 2003, they rode the wave into a pile of rocks; they nearly didn’t make it. Today, they are stronger than ever due to creating a leaner and smarter machine.
While discussing relationships, everyone must understand that it is not a one-way street; both parties have to work hard on the relationship. From a dealer’s perspective, the most important factors may be the amount of advance being offered (never enough for some), the fees being charged or how long it will take to get a contract funded. Most finance companies have each heard this a few thousand times. In general, most companies are cognizant of the dealers’ needs and try to stay as flexible as prudent business practices will allow.
From the perspective of the Special Finance companies, what is important is, of course, profitability and all the components that drive profits. Many still pay attention to key ratios such as look-to-book (the number of deals submitted to the number of deals the dealer puts on the books) or approval-to-fund (how many deals the finance company puts on the books compared to the number they approve). It is important for dealers and their management teams to know if these are key components in the relationship and manage their submissions and deals accordingly.
How does your paper perform? This is something that a dealer should certainly be aware of. If your paper performs better than a finance company’s average in your area, it will often stretch for your business. Conversely, if you are at the wrong end of the spectrum, you could be facing one of those “surprise” faxes or letters informing you that the company is terminating your relationship.
I know more than a few high-volume SF dealers that have regularly scheduled meetings to discuss the performance of their portfolios with the management of their key finance companies. Additionally, they counsel their employees to structure deals that make sense and to be careful not to set the customer up for failure. Finally, while being under no contractual obligation to do so, they go so far as to buy back first payment defaults to ensure that their portfolios perform well. As you can imagine, if those dealers need a favor done, it generally happens.
Also remember that finance company credit analysts and funding clerks are no different than your own employees. While scoring and computer models are often prevalent, these analysts and clerks are indeed people too (in spite of what it occasionally feels like). They certainly have feelings, they hate to feel taken for granted and they hate feeling like they’re always having terse dealership personnel shove deals down their throat – with no appreciation.
They also want to be able to do their jobs as simply and easily as possible. Credit analysts (buyers) want to be able to count on the fact that information being submitted is accurate and complete. Yes, that may be overstating the obvious, but dealership personnel seem to forget the obvious when a deal is hung up in funding after initial information could not be verified.
Finally, I personally know that an occasional pizza sent in during lunchtime or a box of Mrs. Fields cookies delivered to a funding clerk‘s desk can grease the skids to get your dealership’s deals moved to the top of the funding pile. Relationships count!
The Next Great Finance Company
Did I get your attention? New finance companies with significant programs do appear from time to time. More often than not, it is a company that has started life regionally and proved its business model successful, and now with increased capital backing, is ready to take on a national scope. It is important to be constantly aware of the finance landscape. Will they change your business forever? It’s not likely.
Regardless of if you are a franchise or independent dealer, whether you are funding a handful of SF deals each month or hundreds, or if you have tens of finance companies at your avail or are struggling to add the second or third, appreciate what you do have.
Yes, companies appearing on the scene like Centrix Financial can often add $500 to $1,000 a deal in additional gross profit to your SF operation. But, they generally can’t outperform the other companies for an extended period of time, or they become the next statistic. Be realistic, keep your eyes open and hold your ear to the ground. Use the tools and the networks available to you to stay abreast of your market.
There are better methods than relying on the competing SF manager down the street to tell you which finance company is “hot” in the marketplace. First, find a network by attending trade association meetings and conferences, and when you do, don’t spend all of your time in meetings or functions. Take the time to meet other attending dealers and managers to find out what finance companies they are currently having success with.
You can also network online. AutoDealerMonthly.com has a free discussion board (forum) that allows dealers and managers to exchange information on a whole host of issues that face a SF department.
Finally, you can pay for the information. Both AutoCount USA and the R.L. Polk Cross Sell reports have lien holder information available in most markets. Not only will it allow you to see what lien holders are being used by the competition in your market, but how many deals they are actually funding with them, as well as the year, make, model and mileage of the inventory that is being sold through them. Say a competitor suddenly begins using a new company like Wide-Open Wonder Finance. Their deliveries skyrocket because of them, and at the same time, they want to keep that fact under the radar. These reports will show the new company’s presence, so you can make contact as well as begin your due diligence in researching them.
Who should you look for? Look for opportunities in niche areas. One market that many departments overlook is the open Chapter 7 bankruptcy market. This is a segment that has returned to strength following the bankruptcy reform law that went into place in October 2005.
Are you near a military base? If so, that is a niche that you need to be able to serve well. Do you have a problem financing recently discharged bankruptcies? If so, find the companies that prefer that type of paper. Ditto for first time buyers.
Just be careful. I know some dealers and/or SF managers that seem to spend every available minute looking for that next great finance company. You need to be mindful of those that you already have onboard. Sometimes spending more time understanding your existing programs and maximizing relationships can help your department experience significant pick-ups in deals and gross profit.
I always remind managers to look back at how excited they were to add each of the finance companies that they currently have on board. Each time a new company was added, dealers anticipate great new opportunities. In most cases the opportunities are still there – the SF manager just has to remember where (or how to) find them.
Vol 4, Issue 4