Over the last couple of years, the Sub-Prime craze has struck the automotive industry like a freight train. But for many of the pioneers in the industry, nothing has really changed except maybe the fact that more and more Americans fit into the category known as Sub-Prime. Plus the fact that the credit impaired customer is now welcomed business to many financial institutions. For those of you that have been dealing with the mouse houses and running the Buy-Here-Pay-Here lots for the last twenty plus years, the only thing you may get out of this article is a couple new ways to make your life a little easier and maybe make a little more profit. As for the rest of you, well, pretend Sub-Prime finance is like a good meal. The better you prepare it, the better it tastes. Miss one KEY ingredient and the whole meal could be ruined. The following is a list of six key ingredients for Sub-Prime success:
1. The first and main ingredient is attitude. The right attitude is the most crucial ingredient. Remember, the customer with the worst credit is usually the easiest to sell and can often be the most profitable. Don't drag the poor slob into a converted broom closet back in the service department because you're ashamed that one of your real credit citizens may see them and be offended. Treat them with the same respect as the customer that shows up at your dealership with a briefcase full of cash. The more respect and genuine concern you show the sub-prime customer that has been beaten more times than a rented mule, the easier and more profitable the sale will be.
2. Proper training of any staff member that will be in contact As a Twenty Group Moderator, I have a chance to meet at least three times per year with groups of dealers in the Special Finance business. It is always amazing to see the range of numbers for various dealers in the area of average gross profit per retail unit. This range is usually a low of around $1,100 per retail unit to a high of $3,150 per unit with a median of approximately $2,350. For the dealers who consistently average $2,750 plus on 100 or more units per month, there is obviously a common denominator. The secret of this highly profitable level of performance almost always points to the same area. The secret is not a lender advancing 180% of book value or even a consultant advertising "I'll get your average gross to $4,000." The secret is consistentINVENTORY ACQUISITION!
I have often heard these highly successful dealers asked, "How do you maintain such a high gross profit average?" Many times they explain their formula, but the audience is not always listening. Let's take a look at what contributes to average gross profit.
There are primarily three areas which determine the profitability of a deal. They are:
Maximum advance allowed by Lender - Each lender has a formula which is used to calculate the maximum allowable advance to a dealer. The majority of nationally recognized lenders usually advance between 110-120% of NADA trade value.
Customer down payment - The amount of down payment a customer has can impact the gross profit equation, however as an average, the average down payment nationwide is $914.
Inventory Cost of the vehicle - This is virtually the only area that dealers actually control. By targeting vehicles which can be acquired for less than NADA trade value, additional profit is created based on the lenders advance criteria.
Of these three areas, the one sighted by dealers with higher average gross profits is virtually always the inventory cost of the vehicle. By knowing your market and which makes and models are obtainable for less than trade value, a dealer may create additional gross by effecting the deal equation. A good friend of mine who consistently averages over 300 units at $3,100 of gross targets the inventory acquisition process to maximize dollars. It takes a very disciplined process to acquire and offer the right car, structure the deal properly and place the paper with a reputable lender with a competitive program. It is, however, something any dealer may accomplish with work and commitment.
The follow-up to the proper acquisition of inventory,though, is the ability to structure a deal based on maximum gross profit. While working with a major sub-prime lender, I learned that their average contract financed is consistently under-advanced by $800 to $900. So once we obtain the unit for a favorable inventory cost it is important we recognize "what the metal is worth" to the dealership with respect to lender advance. Now we have the equation for maximized gross profit. Until next time, Good Luck!
Mr. Leedom is an NCM Professional Twenty Group Moderator and a partner with NCM Associates (formerly Nichols Campbell & Morrow). If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.
Over the last couple of years, the Sub-Prime craze has struck the automotive industry like a freight train. But for many of the pioneers in the industry, nothing has really changed except maybe the fact that more and more Americans fit into the category known as Sub-Prime. Plus the fact that the credit impaired customer is now welcomed business to many financial institutions. For those of you that have been dealing with the mouse houses and running the Buy-Here-Pay-Here lots for the last twenty plus years, the only thing you may get out of this article is a couple new ways to make your life a little easier and maybe make a little more profit. As for the rest of you, well, pretend Sub-Prime finance is like a good meal. The better you prepare it, the better it tastes. Miss one KEY ingredient and the whole meal could be ruined. The following is a list of six key ingredients for Sub-Prime success:
1. The first and main ingredient is attitude. The right attitude is the most crucial ingredient. Remember, the customer with the worst credit is usually the easiest to sell and can often be the most profitable. Don't drag the poor slob into a converted broom closet back in the service department because you're ashamed that one of your real credit citizens may see them and be offended. Treat them with the same respect as the customer that shows up at your dealership with a briefcase full of cash. The more respect and genuine concern you show the sub-prime customer that has been beaten more times than a rented mule, the easier and more profitable the sale will be.
2. Proper training of any staff member that will be in contact with your dealerships Sub-Prime clientele is a must. Most of your customers are in the credit crisis they are in because they made poor financial decisions in the past. Get back to the basics. Qualify, interview and assist the customer in making an investment that fits their wants, needs and budget that also makes you at least twenty five hundred dollars gross profit. Believe it or not, it's not that hard to do and you will wind up with a satisfied customer. If they are kept in contact with, they might be a good candidate for prime finance in three to five years. Remember that the customers you sell today are an investment in your dealerships' future and success in the years to come, so treat them as such.
3. Proper inventory management and control. Throw your BLACK BOOK AWAY when you are looking at stocking your lot. Ninety-five percent of the lenders you do business with use either N.A.D.A. or KELLEY BLUE BOOK to determine the advance your dealership will receive on the collateral that they are buying because in most cases that is what they are buying as much as the customer - collateral. Use these books as your guide to profit when purchasing your inventory. Who cares what the market is on the car as long as the car lines up in the book far enough back that you can generate at least a twenty-five hundred dollar gross after the lenders fees. Believe it or not, your customer does not know that a rental car company just dumped twenty thousand yellow __________'s into the market last week and they brought two thousand back of book. The bank doesn't care and in most cases doesn't know. Either way, they buy what the book says the automobile is worth. Try not to allow the emotional opinion of what looks good on the lot cost your dealership profit. Remember the slick rides you like to see gracing your front line may be well within your budget and look good...but what about your customer's budget?
4. Make it easier for the customer to do business with your dealership by using PROFESSIONALLY-RUN CREDIT HOT LINES like the services provided by companies like VOISYS SYSTEMS CORPORATION ADTEL INTERNATIONAL etc. Take advantage of the high-quality PRE-APPROVAL and DIRECT MAIL campaigns offered by companies like ACE INNOVATIONS IN MARKETING and CMI. The easier you make it for your potential customer to know you're there, the more customers you will have, along with higher profits! Be creative - use giveaways: TV's, trips, free gas, free service, etc. Watch the leaders in your marketplace. I'm sure there is a pattern and plan of attack they use. Copy it. Don't try to reinvent the wheel, just roll with it.
5. Make sure your dealership has a good portfolio of high-quality lenders that fund like they claim they will. This should allow you to obtain financing for ANY customer with a source of income, down payment and residence. A dealership only needs five to seven good funding sources. If your volume justifies, find a funding source that will allow you to originate you own loans. This will not only add additional fee-based income to your store, but will also give a greater degree of flexibility doing business when your normal funding sources are closed. As you know, if you let the sub-prime customer off the lot the odds are against you in closing the deal. THEY ARE COMPULSIVE SHOPPERS and will not stop until someone SPOTS THEM! If they don't have their stipps take them home to get them. Don't lose control or the time you've invested by trusting them to bring back the stipps. Remember, it was the lack of keeping commitments that placed them in credit position they are in today.
6. As much as many of us in the retail automotive industry HATE AUTOMATION WITH A PASSION it is a necessary evil. Yes, the dreaded COMPUTER! And there are a few very good applications out there that will take a lot of the guesswork out of sub-prime finance as easy as prime. Look for a product that will take your customers' financial information, lenders guidelines, your inventory's values and cross check them against each other while structuring for you deals that should fit with the customers' financial position, the lending criterion and inventory you have in stock. It is also very important to find a product that is not a closed system in which the software company tries to force you to pull credit bureaus through them (at a premium).
In closing, for those of you looking to succeed in the sub-prime arena I have one final suggestion: Do it right the first time because in most cases there is no second chance! If you are not willing to make the commitment both financially and in human resources, don't bother at all. You'll probably just muck it up for the rest of us.