Buy-Here-Pay-Here –A Primer
By Steele Gudal
Judging by the attendance at several recent industry trade shows, more and more dealers are considering entering the potentially lucrative buy-here-pay-here segment. The mature, consolidated nature of the new car business, the "blue sky" associated with buying another new car dealership and direct internet selling initiatives begun by some manufacturers are causing many dealers to explore alternate ways to expand and diversify their businesses.
For many of these dealers, BHPH may be a viable alternative. The market is huge. In fact, the cottage nature of the industry makes it tough to get a handle on exactly how big. Estimates range anywhere from $200-$300 billion in annual sales. With the price of a new car quickly climbing towards $20,000, American working families continue to search for affordable solutions to their transportation needs. Demographic trends suggest that the segment will grow steadily over the next decade. Consistent annual increases in consumer debt levels, record annual bankruptcy filings and the shrinking of the American middle class suggest more and more consumers joining the ranks of the BHPH segment. Add to the mix the fallout in the sub-prime finance sector and the increasing social acceptance and mechanical reliability of older cars, and a largely "underground" segment of the car business makes more and more sense. This rings especially true upon the realization that the BHPH competitive environment is largely weak, fragmented, undercapitalized, and unprofessional. The market represents opportunities for professional, capitalized new car dealers to enter at minimal cost and capture sizeable market share in a market that has traditionally offered the largest profit margins in the industry.
This is the first installment in a series of articles designed to present the key success factors of the BHPH business for those currently operating in it or those interested in learning more about it.
Probably the best piece of advice I could offer a dealer-carried finance operation is among the oldest in our segment- "Take care of your tub." In the days before computers, most BHPH dealers kept customer transaction records on ledger cards organized in small file boxes, or tubs (some, in fact, still do). Savvy dealers knew there was a lot more to BHPH than just selling the car. Never has this been truer than today. Dealers who have the foresight to meticulously select their inventory and recondition their cars thoroughly will be rewarded in the long run. These processes maximize the probability that the car will last the term of the loan and beyond. Another BHPH axiom that has stood the test of time is that if the car stops running, the customer stops paying. The forward-thinking dealer views these expenditures as investments rather than expenses- investments which will pay dividends in the form of satisfied customers and performing loan portfolios. Those dealers who choose to impose minimal quality standards will surely only attract a minimal quality customer and minimal quality loan portfolios. Ultimately, this leads to minimal, if any, profitability.
While the minimum quality standard dealer may save a few bucks initially, his customers will quickly become dissatisfied with their buying experience, quit repaying their loans and bring about negative publicity for the dealer. On the other hand, the prudent dealer who invested more initially eventually begins to see the fruits of his labors: a quality loan portfolio, satisfied customers who generate repeat and referral business and a reputation for selling quality transportation which he is proud to stand behind.
Make no mistake; it's difficult to recondition these cars properly and invest the dollars necessary to make these portfolios perform. But as time goes by the easy way gets harder and the hard way gets easier. Each dealer comes to discover what those before already had learned: Take care of your tub, and your tub will take care of you.
Next month: Capitalizing your business properly
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 franchisees own and service approximately $400 million in BHPH receivables. Gudal personally owns 3 locations in the upper Midwest with $20 million in receivables. sgudal@dealeronline.com
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