Posted 8 years ago
By Kenneth Shilson, CPA
President / Founder
Subprime Analytics (www.subanalytics.com)
NABD (www.bhphinfo.com)
The first half of 2015 is almost
complete and for most buy here, pay here dealers (BHPH) dealers it has been
extremely challenging. Competition from credit unions and franchise dealers,
together with large subprime asset-backed auto finance securitizations, have
reduced the market share of independent dealers. In addition, it has been more
difficult for dealers to attract and retain the best subprime customers. Every
operator should determine how their own business has been affected and what
they must do to compete successfully during the remainder of 2015 and beyond!
Unfortunately, reviewing historical
financial statements and sales reports will not provide the necessary answers.
Financial statements report gross sales profits which (in BHPH) too frequently
do not convert into cash. Further, selling a vehicle and “keeping it sold” can
be very different. Success in the BHPH business is determined by the latter
(keeping the customer paying) rather than delivering the vehicle!
Therefore, I encourage operators to
take a “deeper dive” into their first half results by studying their bad debt
losses. This helps them avoid repeating underwriting and/or collection
mistakes, which have become more expensive due to increased “cash in deal” and
operating expenses.
Some operators don’t analyze losses
because they have centralized underwriting with the same people making the
finance decisions. They mistakenly believe that consistency assures success.
Neither are valid reasons not to “look under your hood” because changes in the
economy, their customers, local market conditions, and increased competition
require operators to adapt.
During the May 2015 NABD Conference
in Las Vegas, new BHPH benchmarks were released. These are the most
comprehensive metrics for the industry and (for the first time), include
benchmarks for lease here, pay here -- which is becoming a popular alternative
business model. The entire report can be downloaded free from www.subanalytics.com in case you missed the Las Vegas Conference. Two videos are
also available on that web site. The first video explains static pool, loss /
liquidation and default-rate performance metrics. The second video explains how
to use these metrics to evaluate portfolio performance and how to compare your
business model with industry peers and the benchmarks.
Although data from the first quarter
of 2015 industry shows competition is decreasing, your ability to regain and
grow market share is not assured. Some important decisions must be made. Should
you increase or decrease ACV? Are down payments and repayments adequate and
comparable to those of your peers? Is the term of your contracts too long?
Answers to these questions will determine the return on your portfolio
investment -- which is the most important measure of your profitability.
Accrual basics net income shown on your financial statement is “fool’s gold”.
At our NABD Boot Camp on August 22-23, we will discuss “best practice” tips
which answer the aforementioned questions.
Operators who sell their contracts
also need to analyze portfolio performance in order to determine the
performance metrics that will indicate the fair value of their portfolio. For
instance, if their net static pool loss rate is 25% and they are offered a 20%
discount from a buyer, the sale of these contracts may be advisable. Operators
also need to know the projected runoff of their portfolio if “collected out” to
project future cash flow and capital requirements.
In the heightened regulatory
environment of today, portfolio analysis can be used to make “disparate impact”
calculations before regulators do. Performance analysis can detect increases in
defaults and provide an early warning that customer complaints will likely
follow.
Hoping that the second half of 2015
will be better is not a prudent strategy – BHPH operators must be proactive to
become competitive and successful. “Learn from your losses so you don’t repeat
them!” Intelligence is the ability to adapt to change.” Good luck!
Kenneth
Shilson, CPA, is President of Subprime Analytics (www.subanalytics.com)
which performs data mining analysis of subprime auto finance portfolios for
capital providers and BHPH operators large and small. The data can be extracted
electronically from most dealer management software systems. Questions can be
directed to ken@kenshilson.com or by calling (832)
767-4759.
NABD
is the only used car special interest group exclusively for the self-finance
industry. Membership is open to anyone in the BHPH industry and to service
providers. Members pay no dues. Upcoming NABD educational opportunities include
a Buy Here, Pay Here Boot Camp in Charlotte, NC on August 22-23, 2015 and the
2015 East Coast Conference for Buy Here, Pay Here in Orlando, Florida on
November 3-5, 2015. For more information contact NABD at (832) 767-4759 or
visit the web site at www.bhphinfo.com.