Posted 3 years ago
By: Ken Shilson,
CPA
President/Founder
Subprime
Analytics
NABD
“Stay at Home
Orders” are now being lifted and operators are reopening their operations to
begin the recovery from the adverse impact of the COVID-19 pandemic. Their
primary objective now must be to repair and replace the damage caused by the
shut down and the decline in their business activity. This can’t be
accomplished overnight and will take time! The proper starting point is
recognition that the pandemic has been a “game changer”. The pandemic event is
unprecedented in our history so business can’t be expected to return to the
“old ways”. Therefore, operators must recognize and adapt to the market changes
it caused which will determine how long the recovery will take. In this article
I discuss several important considerations subprime operators must successfully
address in the months ahead.
The “stay at
home orders” and social distancing restrictions required operators to build
online relationships with their existing customers and new prospects during the
shutdown. Customers now expect to use the internet to originate and to close
auto finance deals with little or no time inside your dealership. Therefore,
operators must implement the technology needed to accomplish both of these
objectives. Your website does not provide these solutions and should only be
considered a start! Instead, technology used to document and close deals online
(like Secure close and others) are available to help operators accomplish these
tasks. In addition, web portals like “Zoom” and “Skype” can be used to visually
connect with customers remotely. These tools not only offer operators ways to
integrate the needed technology into their operations but they also increase
efficiency. Therefore, operators must embrace new technology solutions like
this and not reject them in order to be competitive and to regain lost market
share.
During the
recovery period capital from providers will likely be constrained for several
months. Therefore, operators should not expect to borrow their way through
their recovery. Subprime auto finance is a very capital-intensive business so
where then will operators find the money they need if they can’t borrow it?
First, smart
operators find ways to make more from less! Simply, they must operate more
efficiently by streamlining policies and procedures and automating manual
duties using technology, wherever possible. Technology for the auto industry
has never been better so solutions are available if operators will identify and
implement them. Web based integrated DMS solutions, pay portals, payment
devices, texting technology and social media tools will be needed to compete
and to survive in this new environment. Dealers should not defer expenditures
for technology that increases efficiency and will benefit them in the future.
Internal cash
management and cash flow will be critical during the next year with outside
capital in short supply. Operators must review their expenditures and determine
which are essential. Every expense should be evaluated to determine if they add
value, revenue, profit and increase cash flow. Non-essential expenses should be
eliminated promptly.
The most
significant use of internal cash flow in subprime auto finance relates to your
business model. In the subprime industry (and particularly buy here, pay here)
no universal business model exists. That is, some operators sell more expensive
vehicles, some sell cheaper vehicles, and some are in-between. This directly
affects their “cash in deal” and the amount of money they put on the street at
origination and the time needed for customers to pay them back. Therefore, it
is important to determine if your business model is cash efficient and
generates an acceptable (“ROI”) return on your investment over the contract
term. The answer requires operators to compile historical portfolio performance
data and to forecast future cash flow on a loss-adjusted basis. These loss
adjustments should be derived using metrics like loss to liquidation (the
inverse of CRR) and net static pool rates, after recoveries. If you do not
already have these metrics or are unfamiliar with the aforementioned ROI
calculation contact me for assistance. I have posted two brief instructional
videos on the homepage of www.subanalytics.com which illustrate how to compute
the aforementioned metrics and they can be viewed free of charge. Your metrics
can best be computed electronically from a DMS extract without utilizing any
input by your staff.
Determine where
you have been before deciding where you are going! In connection with NIADA, I
have just compiled the most comprehensive market and trends report, to date, on
the subprime industry. It contains valuable market perspectives from industry
experts on technology, capital, compliance, collections, tax refunds, operating
best practices and benchmark data from several contributors. Obtain a copy from
me or from NIADA and compare your own results with the report data. Determine
what caused any variances and identify the practices that work best by
analyzing your own underwriting and collection performance and reading the
report. Your portfolio performance can be analyzed most effectively using my
Subprime Analytics technology. Do your operating practices need a “tune up”? If
they were not working before the pandemic then why expect them to work after
it? With capital in short supply you can’t afford to make trial and error and
compliance mistakes which cost millions of dollars and compress your profits
and erode cash flow. Learn from your losses and from mistakes of other
operators so you don’t repeat them. Don’t let your compliance guard down during
the recovery as your state AG is watching!
During the
recovery period, you need to have a strategic business plan which includes both
an operating and a financial perspective. Operators do not plan to fail but
they sometimes fail to plan properly! Their plans often do not include
evaluating the financial impact of their operating decisions which can exhaust
available capital quickly. Don’t be guilty of this mistake; make a
comprehensive review of your current business plan and operating model.
Finally, hoping
that things will get better and that you will automatically regain lost market
share is the wrong strategy. You must be proactive to make your recovery happen
in a highly competitive environment. Success requires operators to recognize
the market changes and adopt solutions quickly. Training and education guide
you in that process. Therefore, don’t eliminate educational expenditures from
your budget! Your recovery and your future depend on all these things! Good
Luck!
Kenneth Shilson is President and Founder of
NABD and Subprime Analytics which provides computerized portfolio analysis for
operators and capital providers in the subprime auto finance industry. Their
website is at www.subanalytics.com or phone 281-723-9508. NIADA and NABD will
hold a buy here, pay here and subprime convention in Las Vegas, Nevada, on
September 21-24, 2020, at the Wynn. For further information and to register
visit www.bhphinfo.com or call 832-767-4759.