When these aggressive sales managers drop the ball and do not insist on retrieving the stips and instead go on to next deal, their finance managers compound the problem by hastily forwarding contracts to the banks, without the required supporting documents. They cross their fingers and hope the customers return with the stips, so they can forward them to the banks belatedly. Some banks will hold the offerings until these supporting documents are collected, but many others will not. Too often, in dealerships like these, the back office hasn’t been properly trained on what stips are necessary for quickly funded transactions; they rely solely on the finance managers to validate the transaction prior to sending it the bank. And so the vicious cycle begins and continues. Everyone cuts corners and the contracts in transit are either delayed or not funded.
Inexperienced Finance Managers
Some dealers hire finance managers to do sub prime business, but fail to check their experience or credentials. Too late, they find themselves stuck with personnel who don’t have the slightest idea how sub prime banking works, who don’t know how to read a call back and who take little note of advance guidelines. They contract customers on terms that are not approved by the banks. They forward contracts with improper advances, terms or products sold and then wait for the supporting documents to clear the loan. Soon, the dealer’s contracts in transit list has doubled. Unfortunately, dealers who are not familiar with sub prime lending blame the banks for this and stop doing business with those that fail to fund on a timely basis. They are barking up the wrong tree! The problem is with their personnel, selling and contracting practices.
Ineffective Contracting Practices
Dealerships must have a specific contracting process to ensure that contracts are funded on a timely basis. The process requires monitoring and the monitoring must be done by the dealer. First, the dealer must know whether or not his finance managers are familiar with the term “contract in transit,” and the only way to know is to ask. No system will work, if the personnel in charge either don’t understand it or don’t follow the guidelines. Quick funding is not only a smart way to run a business, it limits the risk of liability. Dealers should not only require that their finance managers have a method in place—to collect supporting documents and to inspect contracts for errors before shipping them off for funding—they should discuss the method and its effectiveness. Nothing should be taken for granted. Check the contracts in transit list every day. Are there more than ten or twenty on the list? If there is, maybe something isn’t working. Find out why.
Spot Deliveries: If spot deliveries are not only allowed, but encouraged, dealers should set strict guidelines for their sales and finance managers. Perhaps it is reasonable for them to spot vehicles that have more than a fifty percent chance of receiving quick bank approval, but this decision should be based on specific bank guidelines, not simply on the willy-nilly desire of the managers to make daily or quick sales.
Yo-Yo Deals: Rushing customers to get them out of the marketplace, when it necessitates recontracting at a later date, is called making a yo-yo deal. It is not only an illegal and deceptive practice, it is extremely hard to monitor. Suppose a dealership delivers more than two hundred units each month and over fifty percent of these customers are asked to return for recontracting. Who keeps up with the closure of these contracts? When does the dealer pay off the trade, sell the trade to a wholesaler or confirm full coverage insurance? The liability for such shoddy contracting is costly. Unfortunately, this practice is all too common. Sales managers argue that not doing business this way diminishes sales, while finance managers forward erroneous or incomplete contracts to the banks simply to get the accounting personnel off their backs. The result? Outstanding contracts snowball and dealers scratch their heads and wonder about their bottom line profits.
A process that ensures contracts are funded in less than a week is one that has the backing of everyone in the dealership, from the dealer down to the finance and sales managers. And, it must have built-in accountability. Sales managers should never be given autonomy to spot customers, unless the contracts have merit and they can guarantee the required stips by the next day. And . . . they must be held accountable for such guarantees. A sales person should not be allowed back on the floor until the stips for such deals are collected and signed off by the finance manager within a designated time period. Of course, the best practice is to make a firm decision to not spot a sub prime transaction until all the required documents are collected. Failed accountability of both sales and finance managers means the contracts in transit list will be lengthy and profits will suffer.
Surefire Transaction System Solutions
The Bucket System: A process known as “the bucket system” is a reliable way to follow up on deliveries. It assists management with the organizing and tracking of every transaction, including those from the contract in transit list. It spots contracts and deliveries waiting for approval, those conditioned or declined or waiting for rehash, those approved and waiting for supporting documents, those where the credit check is not delivered and those approved and ready to be sent to accounting.
Daily Contract Review and Manger Meetings: Once the system is in place, finance managers should review the contracts in transit list every morning and return it to the general manager with proper and full explanations as to why each contract has not been sent to accounting, why it has not been funded by a bank or the funding dates of those that have gone through. Finance managers should contact the banks to learn why funding was denied. No dealer should settle for a “Beats me!” explanation. Some dealerships advocate a morning meeting or a “save a deal meeting.” A meeting, that brings all the sales and finance managers together, is proactive and definitely speeds approval or documentation collection.
Once transactions have been funded, it is prudent for dealers to compare contracts recorded versus those funded. Have their finance managers recorded two points earned, but the transactions were in reality funded on only a half-point earned? Has the dealership been funded hundreds of dollars less than the amounts recorded? Does the accounting office make it a practice to compare and document profit reported by the finance managers versus the amount funded by the bank? Are the differences being picked up as charge backs the following month? If so, the finance mangers are being paid on income they didn’t earn! These finance managers must be made accountable for any differences funded by the bank. If dealers turn a blind eye and accept charge backs on a regular basis, the practice will continue ad infinitum and with decidedly negative results.
Who is double-checking to see if a bank has made a mistake in funding the contract? It happens. Too many mistakes go unchecked every day in the industry. Significant profits are lost.
Contract in Transit is serious business in any dealership. When profits are down, dealers must take a close look at the company’s list and demand accountability from sales and finance managers. The list should be treated with the same degree of attention checking and savings accounts receive. When inexperienced, undertrained or overzealous managers cut the lifeline of the company, policies need to be examined, changed and enforced. An Old English adage says it succinctly and effectively, “Example is better than precept.” Regularly examine the contract in transit list. You may find the way to increasing profits.
Volume 3, Issue 1