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
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.
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
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.
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!
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!
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.
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.
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
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!
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 www.subanalytics.com or call Ken at 281-723-9508. Their services are
designed to help increase capital and to identify more profitable operating