After reading Part 1 of this bog series it is evident that Franchise Dealer’s are entering the Buy Here Pay Here Market, and it is happening NOW. To dissuade any preeminence’s about the structure or stigma of the market, we’ve compiled a list of BHPH Fundamentals and answered some FAQ’s.
1) What EXACTLY does "Buy Here Pay Here" mean? Buy Here Pay Here (BHPH) financing means that you, as the dealer, arrange a loan and client then make payments directly to you. Ultimately the vehicle is purchased through in-house financing versus through a third party--->A bank or financial institution.
Traditionally a monthly or bi-monthly payment arrangement is arranged, and the terms include the client coming to the dealership at payment due date. Although some BHPH dealerships will accept payment by phone or online, many require that you physically bring a check or cash to their location. Therefore the client "buys" the car at the dealership and "pays" on the loan at the dealership site.
The FUNDAMENTALS of it all:
1. Commitment -The number-one difference between special finance and BHPH is whose money you are using. When it’s your own money, the first fundamental is practically a commandment. You must be fully committed to the business with your heart, soul, mind and resources, and keep your focus on the long-term benefits instead of the short-term profits.
2. Capitalization – BHPH is a long-term business venture that requires capital investment. You need enough cash to consistently fund your portfolio for the first two years of operations. Otherwise, you have to start small and grow your portfolio one deal at a time. You’ll still get there. It will just take you longer. The point is you have to think about how to fund your portfolio whether it’s one deal per month or 100.
3. Collections – Selling cars is the easy part. Collecting the payments after the sale is a completely different story. This part of the business is not rocket science. It is, however, a little four-letter word called “work” that is the fundamental element of your entire BHPH business. Your ability to collect on the loans will make or break your success and is the one fundamental around which the entire program is built.
4. Compliance – As a BHPH dealer, you are a lender, a collector and a keeper of hoards of private, personal information regarding your customer base. The compliance requirements you are used to as a dealer only compound with these responsibilities, and there is little room for error.
5. Investigative Selling – Before you loan money to someone, you really need to know a few things about them. Investigative selling is an important step to setting up each individual deal for success. During the interview process, you can learn volumes about the spending and living habits of your prospective customer that will be helpful if you have to find your collateral later. Their answers to routine questions will give you valuable insight in helping to determine whether the deal makes sense for your business.
6. Inventory – The vehicles you sell must be desirable and affordable for your customer. They must also be able to last the term of the contracts. And although your inventory values may not be tied directly to a valuation guide, one of the worst things you can do is stretch your ACVs too far above the market value. Your portfolio will quickly become unrealistically inflated.
7. Metrics – Every day you must be able to accurately review the books of the business and hold the team accountable for performance. BHPH is a daily business, so you need accurate metrics to help you make the most informed decisions possible.
8. Deal Structure – The structure of the deal determines the elements of risk, how much cash you are willing to put on the street and your profit margin, above an allocated “discount” that covers your standard losses. Without enough margin built into each deal of your portfolio, your losses will consume any profits.
9. Consistency – BHPH requires patience, persistence and consistency. It is about repeatedly doing processes and procedures correctly and keeping your eye on the long-term goal.
10. Underwriting – Your underwriting guidelines are your roadmap to building a successful portfolio. You would be doing yourself a favor if you follow the lead of Franchise dealer’s who have already paved the way, and verify every aspect and stipulation of each and every deal before you fund it. Your guidelines are in place to help you manage the risk of your portfolio, and there is absolutely no room for shortcuts.
BHPH can be a very viable and profitable alternative for financing customers in the “no-man’s land” of credit. It affords you the opportunity to take your business in your own hands, decrease your dependency on outside financing sources and at the same time, build a portfolio of wealth. If you master each of these fundamentals, you will be well on your way to enjoying the benefits of one of the best business decisions that can be made in the automotive industry, especially today.