Keeping The Buy Here, Pay Here Momentum Going!

Posted 1 year ago

By Kenneth Shilson

President, Subprime Analytics

            The Buy Here, Pay Here (“BHPH”) industry navigated successfully through the pandemic while some other industries did not.  This is attributable to the entrepreneurial skill and creativity of BHPH operators and to our government who provided economic stimulus for subprime customers when they needed it the most.  The challenge now is “how to keep that momentum going” given the economic changes of 2022 which include inflation, higher interest rates, supply chain issues, and other developments impacting the used car industry.  This article addresses the challenges ahead and offers suggestions to help readers navigate more successfully.

            Prior to putting the pandemic in the rearview mirror, it is important to review what we have learned during the last two years.  The cost and availability of the “right inventory” continues to constrain sales growth because you can’t sell them if you don’t acquire them, but at what cost?  Inventory sourcing is critical so you need to use all the latest technology to find and buy the inventory you need.  Don’t be afraid to buy out of your local market and acquire vehicles your competitors don’t have and can’t find in their local markets.  Additional shipping costs are often worth the investment and better than overpaying for the same inventory your competitors are bidding on.

            The capital markets have tightened and finding the right financial partner is extremely competitive.  You will need portfolio performance metrics like static pool, CRR, and default rates to validate your business model and collection performance.  Effective January 1, 2023, a new credit loss measurement standard (CECL) will require you to provide a life of loan loss reserve on your installment receivables and/or lease receivables.  This new measurement computation will likely increase your bad debt loss reserve and reduce your equity.  This change will trigger existing loan covenants thereby disrupting your current borrowing relationship.  Therefore, you need to calculate the impact and communicate with your financial advisor and lender now.  Lenders do not like surprises and neither will you!

            The pandemic changed customer attitudes about the amount of time they spend in your dealership.  Customers today want to do more online and minimize their time at your dealership.  Ideally, they want to find the vehicle, contract the purchase, and close the deal with only a test drive in between.  Dealers must embrace the “Fintech” model which automates the entire process to these customers.  Social media has become essential!  Operators must expand their use of social media because it has become the most efficient way to “connect and to collect” from subprime customers.  This will necessitate changes in the current ways you are advertising, responding to customer leads, and collecting payments.  Automating these processes will increase your efficiency and profitability.   Your goal must be to “make more from less” because profit margins are being compressed in the current economic environment.

            Although there is no universal business model in BHPH, it all starts with the right model or ends with the wrong one!  BHPH is a very capital intensive business and cash flow is critical.  One very successful operator said “cash is the most important BHPH measure, everything else is an illusion.”  Therefore, evaluate your business model by determining your cash return on investment (“Cash ROI”).  That is, how much money you are putting on the street (cash in deal) versus the cash returned from downpayments, customer repayments and finance charges, reduced by past and expected future losses.   Sound familiar?  It is the same way you evaluate any investment.  You need return of your investment before you can have any return on your investment.  Therefore, shorter contract terms are better than longer because the cash return is quicker which increases your cash ROI!

            In underwriting your customers, focus on the items you can control and those which will generate cash quickly.  For instance, down payments and customer repayments determine how fast you recover your “cash in deal” and generate profit!  Higher ACV vehicles don’t guarantee that customers will pay for them or that you will avoid having repos.  Further, higher ACV vehicles are typically financed over longer terms with lower gross profit margins so higher vehicle costs mean it takes longer to recover your investment.  Although you want to maximize gross profit on every deal it needs to be collectible.  That is the difference between selling vehicles and keeping them sold!

            The best way to comply with the new credit loss measurement standard and to monitor portfolio performance is by developing historical metrics.  Capital providers will require them in providing lines of credit and you also need this information to make more informed operating decisions.  Your solutions are inside the database in your DMS software system, you just need to access them.

            Credit scoring systems assure consistency of underwriting but don’t guarantee success.  Successful scoring systems are built by analyzing your own data and assigning weights to the customer attributes.  Their design must be based on your own data!  There is no universal formula for BHPH success just as there is no universal business model.  Your underwriting decisions must be based on capital availability and the risk you are willing to take.

            During the pandemic it became evident that the “old ways” don’t work like they used to!  The current environment is different from the past.  Without government stimulus subsidies subprime customers now have reduced liquidity.  Operators face inflationary increases, higher borrowing and operating costs, and sales constraints from reasonable cost inventory availability.  These factors all combine to reduce margins which must be offset by operating efficiency and prudent underwriting.  Operators must use the latest technologies (which are the best in BHPH history) to increase cash flow and profitability.  The choice is automation or extermination!

            Dealer training and education has never been more important.  You must identify and understand the market changes and adapt quickly.  The quicker you learn, the more you will earn!  Good luck!

Kenneth Shilson is President and Founder of Subprime Analytics which provides computerized portfolio analysis for operators and capital providers in the subprime auto finance industry.  Visit our website at or call Ken at 281-723-9508. Their services are designed to help increase capital and to identify more profitable operating practices.