Capitalizing Your Buy-Here-Pay-Here
By Steele Gudal
In order for a new car dealer to realize maximum returns on sales and investment in the BHPH segment, he must be willing and able to invest the dollars necessary to properly capitalize the business. The good news is that the investment is typically but a fraction of what it would be to invest in another new car dealership.
The better news is that, when executed properly, the returns can be far greater in BHPH. The best news is that risk and overhead are typically lower and control greater! As discussed last issue, selecting the appropriate inventory and reconditioning it thoroughly prior to sale are the first important steps in this process. Further, the dealer must realize that the BHPH customer has many of the same wants and needs as the A credit buyer: they want a clean, well-lit, place to shop, they prefer a nice building located on a main retail thoroughfare, and they want the peace of mind that comes with warranty and extended service programs. Those dealers who can provide these will attract a more stable, credit-worthy customer than the proverbial as-is dealer.
The next important operational step in establishing a high level, optimally profitable BHPH operation is a credit facility adequate for the dealer to fund his loans and collect them to term. We believe it is a serious mistake to rely solely on bulk sales of receivables to cash flow the business. I cannot overemphasize the importance of operating this business with a finance company mentality as well as a car dealer mentality. Traditionally, many BHPH dealers have been great at the "Buy-Here," and not so great at the "Pay-Here." We've seen many dealers sell portfolios of loans for 60 or 70 cents on the dollar or less to free up capital to fund subsequent deals. In this instance, the dealer not only gives away a substantial portion of his sales gross, but also forfeits the right to realize interest income (which is often substantial) over the term of the loan. In essence, this dealer has virtually guaranteed himself minimal returns over the long term.
Forward thinking operators avoid this scenario at any cost, either by using their own capital (rare), or setting up a commercial line of credit to fund receivables growth (more common). Imagine how tough it would be to run your new car business without a floorplan line. Your inventory, traffic and sales would all be minimal, right? The BHPH dealer without a receivables line is in a similar quandary. He needs this funding to fully reap the benefits of multiple profit centers (sales, finance and warranty) in the retail automotive industry's biggest segment.
Many national players such as Bank of America, Finova and Cygnet finance, as well as many regional and local sources, offer such relationships. These relationships often advance the dealer enough cash to run the business while allowing him to keep all or part of the interest income collected over the term of the loan. They typically are offered only to dealers who demonstrate that they have the capital, policies, procedures and technology in place to operate and control the business. These and other topics will be explored in future installments of this column.
The Buy-Here-Pay-Here business is just like any other business in America-those who can most efficiently and effectively access capital will control the game. Since relatively few are able to accomplish this, those that do set themselves up to be what Wall Street calls "Category Killers"-competitors so strong that they dominate their competitors and gain market share almost at will. How many new car dealers can honestly say they enjoy such a market presence?
Steele Gudal is the President and COO of J.D. Byrider Franchising, a chain of 95 buy-here-pay-here dealerships operating in 32 states and Canada. Byrider and its franchises own and service approximately $400 million in BHPH receivables. Gudal personally owns three locations in the upper Midwest with $20 million in receivables. sgudal@dealeronline.com
