7 Essentials for Buy-Here, Pay-Here Success - DealersEdge
7 Essentials for Buy-Here, Pay-Here Success - DealersEdge 7 Essentials for Buy-Here, Pay-Here Success - DealersEdge
Don Miller: 7 Essentials for Buy-Here,Pay-Here SuccessHow to create BHPH or LHPH Success in your Dealership orGroup - Using Existing Facilities or Satellite lotsWithDon Miller, Senior Consultant, Constellation Automotive SolutionsModerated byMike Bowers, Executive Editor, DealersEdge
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- Page 6 and 7: 7 KEYS TO SUCCESS IN DCFWhat is DCF
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- Page 10 and 11: Key #1 Business ModelCASH FLOW ANAL
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- Page 16 and 17: Key #2 ControlPolicies & Procedures
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- Page 20 and 21: Key #2 ControlNumbers to MonitorCOL
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- Page 39 and 40: 7 KEYS TO SUCCESS IN DCFKey #5Payme
- Page 41 and 42: Key #5 Payment ProcessingTYPES:Debi
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Don Miller: 7 <strong>Essentials</strong> <strong>for</strong> <strong>Buy</strong>-<strong>Here</strong>,<strong>Pay</strong>-<strong>Here</strong> <strong>Success</strong>How to create BHPH or LHPH <strong>Success</strong> in your Dealership orGroup - Using Existing Facilities or Satellite lotsWithDon Miller, Senior Consultant, Constellation Automotive SolutionsModerated byMike Bowers, Executive Editor, <strong>DealersEdge</strong>
Don Miller, Senior Consultant, Constellation Automotive SolutionsMr. Miller currently supervises Constellation’s DCF ConsultingGroup and, as a Senior Consultant, Don’s duties include dataanalysis, phone consulting, on-lot inspections and DCF training<strong>for</strong> client dealers across the nation. Don is proficient withanalytical tools and continues to develop new and improveddata analysis tools as well as providing the monthly DCFComposites. Mr. Miller spent the last 8 years as a consultant<strong>for</strong> CarBiz USA, Inc., supervising the consulting operation <strong>for</strong> the past 5 years. Donhas been in the automotive industry since 1987. Prior to joining CarBiz, Mr. Millerenjoyed a successful career in automotive management, in both the sales andfinance departments. Don was a specialist in Secondary Financing and SalesTraining.http://www.constellationauto.com
7 KEYS TO SUCCESSIn Dealer Controlled Financing
7 KEYS TO SUCCESS IN DCFTODAY’S PRESENTER Senior Consultant and Consulting Supervisor atConstellation Automotive Solutions Over 24 Years of Automotive Experience DCF Trainer and Consultant Since 2003 Guest Speaker & Panel MemberDon Miller Regular Contributor in Trade Publications
7 KEYS TO SUCCESS IN DCF What is DCF? Keys to <strong>Success</strong>:1. Business Model2. Controls3. Selling System4. Approval Process5. <strong>Pay</strong>ment Processing6. Delinquency Management7. Marketing Summary & QuestionsOverview
7 KEYS TO SUCCESS IN DCFWhat is DCF?DEALER CONTROLLED FINANCING<strong>Buy</strong> <strong>Here</strong>–<strong>Pay</strong> <strong>Here</strong>, Lease <strong>Here</strong>–<strong>Pay</strong> <strong>Here</strong>, Rent–To–OwnBHPH began in 1915 in Indianapolis, INEstimated $50 billion industry todayTypically, most inventory cost and all profit is <strong>for</strong>thcomingThe dealership is in control of the term of the loan
7 KEYS TO SUCCESS IN DCFKey #1Business Model BHPH or LHPH Capital Requirements Inventory Sources
Key #1 Business Model<strong>Buy</strong> <strong>Here</strong>-<strong>Pay</strong> <strong>Here</strong> –or– Lease <strong>Here</strong>-<strong>Pay</strong> <strong>Here</strong>LEASE HERE-PAY HERE (LHPH):Advantages: Sales tax advantage in most states with tax collected per payment Allows <strong>for</strong> the collection of tax-free security deposits Business tax advantages based on when income is realized Dealership retains ownership making repossession an easier process Leases unaffected by bankruptcyDisadvantages: Fewer capital sources buying LHPH contracts Separate accounting systems Vicarious liability exposure Unfamiliar to consumers and staff Unique terminology and consumer rights
Key #1 Business Model<strong>Buy</strong> <strong>Here</strong>-<strong>Pay</strong> <strong>Here</strong> –or– Lease <strong>Here</strong>-<strong>Pay</strong> <strong>Here</strong>BUY HERE-PAY HERE (BHPH):Advantages: Capital sources are readily available to purchase BHPH contracts Purchases are more familiar and easier <strong>for</strong> customers to understand No vicarious liability exposure Typical accounting systemsDisadvantages: All sales tax paid at time of sale (except Texas) All revenue and income recognized at time of sale <strong>for</strong> tax purposes Repossession laws are complex and vary from state to state Subject to bankruptcy filings
Key #1 Business ModelCASH FLOW ANALYSIS:CAPITAL REQUIREMENTBreakeven Point: The number of accounts at which a dealer collects enough payments to payall expenses and inventory replacement costs. Must reach and maintain this level of accountsCash-In-Deal (CID): The amount of money the dealer has invested in a vehicle at time of delivery. Total Vehicle Cost - Total Down <strong>Pay</strong>ment = Cash-In-Deal (CID) Determines inventory purchasing and reconditioning guidelines Sets average down payment requirements
Key #1 Business ModelCAPITAL REQUIREMENTCID DETERMINES YOUR INVENTORY LEVELS:Monthly amount of capital at risk / Number of projected sales = AverageCash-In-DealAverage Cash-In-Deal + Average projected down payment =Average total inventory costAverage total inventory cost – Anticipated recon expenses =Average purchase price of inventory
Key #1 Business ModelEXAMPLE:CAPITAL REQUIREMENT$40,000 / 20 = $2000(capital at risk) (sales per month) (Cash-In-Deal)$2000 + $700 = $2700(Cash-In-Deal) (Down <strong>Pay</strong>ment) (Total Inventory Cost)$2700 - $500 = $2200(Total Inventory Cost) (Reconditioning)(Average Purchase Price)A $1,000 increase in CID may require as much as$250,000 in additional capital in just one year.
Key #1 Business ModelCAPITAL REQUIREMENTINVENTORY SOURCES: Street (“We <strong>Buy</strong> Cars” advertising) Other Dealers Wholesalers Auction Thinking outside the box Estate sales Local finance companies, banks, and credit unions Legal notice section of local newspapers Rental vehicle agencies Private party vehicles displayed in local parking lots Companies with fleets of vehicles
7 KEYS TO SUCCESS IN DCFKey #2Control Policies & Procedures Clear Chain of Command Audit & inspect Numbers to Monitor
Key #2 ControlPolicies & ProceduresPOLICIESStatements and guidelines that outline what business you are inand how you are going to run it. Contribute to the continuity of the dealership and the entireorganization Provide an invaluable tool in the training of new employees Aide in avoiding discrimination lawsuits
Key #2 ControlPolicies & ProceduresPROCEDURESA sequence of actions which have to be executed in the same mannerin order to always obtain the same result under the samecircumstances. Allows specific tasks to be assigned to specific people Outline an employee’s tasks and duties Allows employees to work independently of managementguidance
Key #2 ControlChain of CommandAPPROVAL PROCESSUnderwriting guideline exceptionsLoan modifications / rewritesRepossessionsCharge-offsJob DescriptionsClear list of responsibilitiesAnd to whom they report to
Key #2 ControlAudit & InspectINSPECTING WHAT YOU EXPECT Where are you in relation to where you want to be? How are you doing in the process of pursuing your goals? Establishes the expectation of what you asked <strong>for</strong> is important. Opportunities to praise, reward and remind. Determine if actions taken produce the desired results.MEASURING PERFORMANCE Track and monitor important figures weekly Weekly analysis allows <strong>for</strong> correcting dangerous trends quickly Your data is like gold – mine it often
Key #2 ControlNumbers to MonitorSALES:Traffic (lot ups & phone ups)Cash In Deal (total cost - total down)Cash Down (as % of selling price)Contract Terms and <strong>Pay</strong>ments
Key #2 ControlNumbers to MonitorCOLLECTIONS:Collection Rate (car payments/projected payments),First run Delinquency ($1/1 day late)Unresolved Percentage (% without firm agreements)Recency (% that have paid within a set time frame)Rewrites (contract alterations)
Key #2 ControlNumbers to MonitorINVENTORY:Units Available <strong>for</strong> FinancingAverage Purchase PriceReconditioning (as % of purchase price)Average ageAverage mileage
7 KEYS TO SUCCESS IN DCFKey #3Selling System Know your Customer Sell Your Program, Not the Car Structuring Deals <strong>for</strong> <strong>Success</strong> Gross Profit & Interest Rates
Key #3 Selling SystemKnow Your CustomersCUSTOMER TRAITS90% of all people are good peopleThey are not good money managersThey will not pay if the car does not runThey will accept more financial responsibility than they can af<strong>for</strong>dThey have been trained to lie and deceive to obtain financingThey can af<strong>for</strong>d between $65 and $85 weekly <strong>for</strong> a car paymentThey will follow almost any process if they trust youThey often cannot pay on time
Key #3 Selling SystemSell Your Program, Not Your CarSALES PROCESSIntroduces your finance programAides the staff in gaining and maintaining controlSelect qualified customersProcess the sale of automobilesEducates customers on collection policies
Key #3 Selling SystemSell Your Program, Not Your CarSALES PROCESSGreeting / PresentationQualifying ConversationTest DriveTerms PresentationLoan ApplicationVerification CallsUnderwriting / ApprovalDelivery
Key #3 Selling SystemStructuring Deals For <strong>Success</strong>PAY DAY PAYMENTSEasier <strong>for</strong> the customers to remember their due datesAide the staff in identifying customer issues quickerFLEXIBLE DOWN PAYMENTThe customer and the customer’s down payment are separateThe customer should be evaluated on his ability to payDown payment is an area where the manager should be creative
Key #3 Selling SystemStructuring Deals For <strong>Success</strong>PAYMENT AMOUNT Too low a payment and the loan will run longer than the car. Too high a payment increases the odds of collection problemsCONTRACT TERM Longer the term, greater the chances <strong>for</strong> mechanical issues Increases the chances of an adverse occurrence in customer’s lives Contract Term Extenders: Excessive Gross Profit High Interest Rates
Key #3 Selling SystemGross ProfitGROSS PROFIT:In the Retail Industry:Gross profit is a point of purchase event1 risk factor associated with gross profit; not enoughIn the Retail Industry:Gross profit is a long-term event2 risk factors associated with gross profit; not enough and too much
Key #3 Selling SystemGROSS PROFIT:Gross ProfitNot Enough:The gross profits are not sufficient to sustain the companyat a profitable levelToo Much:The gross profits are totally offset by additional collectionexpense and delinquency losses.
Key #3 Selling SystemInterest RateMany DCF dealers charge the maximum rate allowed in their stateHigh rates is a leading contributor to the poor image the DCF industryMany dealers site the increased risk of dealing with DCF customers asjustification <strong>for</strong> the higher ratesIn reality, the risk can be offset with a much lower rate
Key #3 Selling SystemInterest RateDETERMINING INTEREST RATE:State Maximums: The highest amount of interest allowable May cause contract length to be extended artificially Hardest to justify to customersRask Based: The annual interest collected meets or exceeds net charge-off amount Comparable to or less than Special Finance ratesMarketing Tool: A lower rate than is necessary to offset net charge-offs Used in advertising and marketing campaigns
7 KEYS TO SUCCESS IN DCFKey #4Approval Process Loan Applications Underwriting Closing the Deal Strong
Key #4 Approval ProcessLoan ApplicationsTIPS & TECHNIQUESThe application is taken in a private areaThe customer is relaxedThe customer is in<strong>for</strong>med of the time involvedThe customer is not allowed to complete the applicationThe employee must use neat handwritingThe employee probes the customer if they’re holding back
Key #4 Approval ProcessLoan ApplicationsWRITTEN 3 rd PARTY VERIFICATIONResidenceRecent Utility BillsRecent Rent Receipts (with address)EmploymentRecent <strong>Pay</strong> Stubs (2)Recent Bank StatementsLetter from Employer
Key #4 Approval ProcessVERBAL VERIFICATIONResidenceLandlordLoan ApplicationsEmploymentHR Department or SupervisorReferencesTalk to friends and family
Key #4 Approval ProcessUnderwritingUNDERWRITING METHODS“Fog a Mirror”Loose approval processHigher delinquencies, repossessions and charge-offsScoring SystemsAnalytical backingReasonable delinquencies, repossessions and charge-offs
Key #4 Approval ProcessClosing The Deal StrongCUSTOMER RESPONSIBILITIES:To pay on timeTo contact the dealership to discuss the problemTo notify if they move or change jobsOTHER ITEMS TO REVIEW:Repairs after the saleAvailable payment methodsTrade back policyConsequences of defaulting on the loan
7 KEYS TO SUCCESS IN DCFKey #5<strong>Pay</strong>mentProcessing In-Person <strong>Pay</strong>ments <strong>Pay</strong>ment Convenience
Key #5 <strong>Pay</strong>ment ProcessingIn-Person <strong>Pay</strong>mentsIN-PERSON PAYMENTS:Allows <strong>for</strong> consistent contact with the customerAllows more opportunities to communicate with the customerAllows <strong>for</strong> consistent contact with the collateralTypically paid in cashLIMITED LENDING RADIUS:Encourages in-person paymentsReduces employee’s time in the fieldReduces repossession expenses
Key #5 <strong>Pay</strong>ment ProcessingTYPES:Debit cardsCredit cardsACH paymentsMETHODS:Over the phoneWeb portalsAuto-pay<strong>Pay</strong>ment Convenience
7 KEYS TO SUCCESS IN DCFKey #6DelinquencyManagement Field Work Repossessing the Customer, Not the Car <strong>Pay</strong>ment Assurance Devices & GPS
Key #6 Delinquency ManagementField WorkPURPOSE OF A FIELD CALL:To understand the customer’s level of commitmentTo physically identify and evaluate the collateralTo show the customer your level of commitmentTo express concern <strong>for</strong> the lack of communicationTo encourage the customer to come to the dealershipTo recover the collateral, if necessary
Key #6 Delinquency ManagementRepossessing the Customer, Not the CarPAYMENT AGREEMENTS:Allows the customer to catch up a delinquent paymentSeries of payments over a short termOne payment on a set dateREWRITES:Restructuring of the original contracts terms and/or conditionsEnsure the customer’s due date is the same as their paydayAbility to add any major repairs (in some states)Ability to bring an account to current status
Key #6 Delinquency Management<strong>Pay</strong>ment Assurance Devices & GPSADVANTAGES:Audible reminder when payment is dueAbility to disable vehicles <strong>for</strong> lack of payment (in some states)Aides in repossessions by locating the vehicleDISADVANTAGES:Customers perception is poor and indicates a lack of trustState cure requirements still in effectCan be a substantial capital investment (depending on sales volume)May be used as substitute <strong>for</strong> good collection practices
7 KEYS TO SUCCESS IN DCFKey #7Marketing Merchandising Promotions Social Media
KEY #7 MarketingDifferent Strokes <strong>for</strong> Different FolksMERCHANDISING – Take a Fresh Look:What do they think when they drive by the lot?Is it appealing?Does a prospect want to stop and shop?EFFECTIVE ADVERTISING:Generates the most traffic <strong>for</strong> the least costKnow your customerDon’t advertise to the wrong audience
KEY #7 MarketingDifferent Strokes <strong>for</strong> Different FolksPROMOTIONS:Set the dealership apart <strong>for</strong> the competitionPlay an important role in: Customer retention Attracting new customers Obtaining referralsAide in the Collection process Rewards <strong>for</strong> on-time payments Address holiday collection issues
7 KEYS TO SUCCESS IN DCFSocial Media & MarketingWhat does it all mean?Will it work <strong>for</strong> me?Do my customers really care?
7 KEYS TO SUCCESS IN DCFQuestions
7 KEYS TO SUCCESS IN DCFwww.ConstellationAuto.com800-654-4955DMiller@ConstellationAuto.com