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What BHPH Dealers Missed by Not Attending the NIADA Convention

The NIADA Convention in San Antonio was excellent for me! And for most who attended! What was the value? What...

Published Articles

2018

It is well known that Buy Here Pay Here (BHPH) contracts can be a challenge to collect. We are, after all, extending financing to those who have not shown much financial responsibility in the past and who are often among the car buyers with the lowest income. Yet, many BHPH operations do very well with this poor credit customer by implementing some key elements in their collections process. I’ve added another critical one that helps with bank deposits and bonuses and morale! It has to do with clarifying when action is to be taken. It is about helping collectors and collections supervisors do their job with consistency and without remorse. When a customer defaults, it is important to immediately recognize that “somebody messed up.” We just have to determine whether it was the customer or us.

Timely and consistent enforcement is vital when it comes to collecting from the poorest of the poor credit customers. They have to be “retrained,” in a way. Generally, this means stricter guidelines and less tolerance for delinquency. More specifically, for us to be successful at collecting payments in BHPH, we have to communicate expectations very clearly and we have to demonstrate that we are serious about enforcing those expectations. 

In my years and miles of BHPH experience, I see two basic approaches to collections: 1) demand payments or 2) demand communication. Since the first results in too many repos, I recommend and teach the latter – demanding that the customer notify us when there is a problem and being prepared to work through the problem when the customer has earned that cooperation. So, keeping with that approach, we can focus on the issue of the breakdown in communication. When a customer is due on Friday but appears on the past due list Saturday morning without any contact whatsoever, our first thought should be that somebody messed up. Of course, it may turn out to be that the customer/debtor is entirely to blame. But, before we act, we need to always ask ourselves if we played a role. How could we bear some responsibility as the dealer/creditor? Let me count the ways:

  1. Did we set the payments too high?
  2. Did the customer actually phone in or otherwise make an arrangement that we failed to record?
  3. Did we communicate very clearly, in writing what we expect of the customer is such situations?
  4. Is there a mechanical issue?
  5. If there was an arrangement or extension, did we require too much too soon?
  6. Have all payments (online, night drop, etc.) been posted/applied properly?
  7. Has our approach to prior late payments contributed in any way?

These are just some of the ways we can end up bearing blame for a customer’s delinquency. In order for us to take consistent and confident action, we need to always be able to eliminate the possibility that we contributed to the issue. We need to know with certainty that it was the customer who messed up!

My clients often hear me talk about the importance of maintaining morale in the collections department. It is, after all, a very difficult job. When we find folks who do the job well, we should do what we can to keep them around! To keep good collectors, it is essential that we provide them with plenty of training and resources and follow that up with a pay plan that rewards them for hitting the right targets. We also have to “back them up” when they follow our policies. This idea that we act only when we have established that it was, in fact, the customer who messed up may seem like a simple one. But, it plays a big role in the day-to-day mindset of our collections team. By keeping this in perspective, the boundaries are clear, the consequences are consistent and valued collectors can avoid having remorse over having to act.

For almost 18 years, trainees have heard me emphasize the need to avoid taking broken promises and defaults too personally. We like employees to “take ownership” in their work but owning the mistakes of others can eat away at morale and can cause our valuable collectors to start looking for other work. It’s NOT personal! I suggest a more analytical or even scientific approach – for every action, there is a reaction. In training, we teach that when a customer does “X”, we do “Y”. Like Newton’s laws in physics – simple science. Nothing personal about it. This helps collectors do their job in a simpler way and hopefully with a smile on their face. 

Collectors and their supervisors need to be able to lay their head on the pillow at night knowing that they did their job exactly as they were supposed to do it. And, if any customer suffered consequences, they can know with certainty that it was the customer who failed to do what was expected!

2017

If I am an analyst at Bank of America, high or increasing delinquency suggests something for sure. But, if I am measuring delinquency in Buy Here Pay Here (BHPH) or subprime auto portfolios, my expectation would and should be much different! Let me first say that delinquency in Buy Here Pay Here matters. It always will. Too often, though, I encounter dealers that place too much emphasis on delinquency. That can become a problem in a number of ways. Delinquency does not tell the entire story when it comes to managing poor credit accounts. It doesn’t even tell the most important part of the story. As a result, too many dealers and managers spend their day frustrated and pushing a rock uphill.

Let me back up a bit. Let’s first accept who this BHPH customer is. This is a customer who has not shown financial responsibility in the past. They do not manage money well. Plus, they are among the car buyers with the lowest income. As BHPH dealers, we have elected to accept that risk and the best among us work to create a program and process that will allow this customer to be successful with their auto financing. The typical BHPH customer will experience setbacks during the life of their BHPH loan. The longer the note, the more true that statement becomes. The question is how we will respond as creditors when those blips appear on the radar.

In my experience, there are 2 distinct ways to manage Buy Here Pay Here collections – 2 approaches that are diametrically opposed to one another. There is no real middle ground. I’ll call the first the “iron fist” approach. This is the “pay by 6pm today or else” approach. Dealers who adopt this approach definitely measure their success with a delinquency report. The alternate approach is softer – the “bend without breaking” philosophy.  Both approaches can produce near-term payments. But, the iron-fisters are much more likely to have a pile of repos in the back lot! Those who manage with that iron fist get some of those payments by 6pm … but at what cost?!

You may already be surmising that I urge my clients to adopt the latter approach and to be prepared to bend. I want my clients and their customers to be successful. I encourage my clients to focus on putting money in the bank, even if it doesn’t all come on the day it was due. To do so, it is important to bring a spirit of cooperation to the collections department every day. The price of flexibility often translates into higher delinquency. Is higher delinquency a problem? It certainly can be if we have a line of credit that excludes accounts from the borrowing base based on delinquency. And it definitely frustrates collectors who have to meet a certain delinquency to earn a bonus. Being delinquent is no fun for the customer either, especially when being hounded by frustrated and irritated collectors! 

I’ll say it again … delinquency will always matter in collections, even in my approach to managing BHPH accounts. I simply suggest that dealers in this business should learn to shift the daily emphasis (and their collectors’ pay plans) away from delinquency to more toward recency and collection efficiency. That label – collection efficiency – is mine. I have been measuring it for clients for more than 15 years. In short, it has to do with measuring the dollars that we put in the bank compared the dollars that were contractually expected. In other words, we know what the portfolio was projected to produce. How did we do??? Most of us recognize right away that not all of those dollars were deposited on time. Some were on time while others came late and a few may have even arrived early. By focusing on how well we did at converting expected money into actual deposits, we create an environment that promotes flexibility and cooperation. Morale in the collections department is much better! We have a chance to keep good collectors on board for the long haul! The customers definitely appreciate the flexibility and managers just have to deal with those who begin to take advantage. The dealer is better able to predict cash flow based on these results – so important in BHPH! Now, if we could just get the bank to revise the restrictions on qualified collateral, we could be more cooperative and save more accounts!

Bending without breaking is the better, more sustainable approach. Dealers who aren’t there would do well to think efficiency and recency and dollars in the bank and look less often at 1-day delinquency. Until then, it is useful to remember that short-term delinquency is our reality in the Buy Here Pay Here business. We have to constantly remind ourselves what delinquency does and does NOT tell us about the job that our collectors are doing. A shift in our thinking can make everyone happier – the collectors, the customers, and the dealers!

2005

Ah, the big question … how much cash will it take?! It is an important one too because this is a business where people go broke while showing big profit margins on their profit and loss reports! When this question comes up in the seminars, the attendees usually get my long-winded response. You get the quick answer today! Most Buy Here – Pay Here start-ups will require from 250K to 750K to grow to that “turnover” point where they begin to generate positive cash. Why the disparity? Sales volume, cash down, cost of car, etc, etc, etc. Overhead of the operation is obviously a significant factor as well. There is a broad range of figures when it comes to dealers’ cost of operating.

I have witnessed dealers reach positive cash in less than a year on just over 100K! Recently! I know what you must be thinking, but I saw it with my own eyes and I provided consultation from their first inquiries about the business until their last draw on the line of credit. Just over 100K invested before they were collecting enough cash to cover overhead and replace inventory. The keys to their extraordinary success? A favorable market, low operating costs, and a very skilled buyer.

It is entirely possible to start a very successful BH-PH operation with less than 300K. I have consulted dozens of start-ups in several states who turned positive with capital investment in the 200’s, usually in 12-15 months.

I work with a lot of cash flow and profit projections. My clients are often surprised at how much impact a change such as an increase of $300 to the average unit cost can have on the projected capital needs. Consider a dealership selling 30 per month at an average unit cost of $2000. The cash flow projecting tool that I designed shows that when that average is increased by just $300, the cash required to turn positive increases by $119,891! And the time to reach positive cash is postponed by 7 months! That is why the answer is not always a quick and simple one. 

So, how should you decide your model? Should you decide the model and use that information to determine how much capital to plan? Or are you in the same situation as most of my clients, choosing a model based largely on the available cash? I can help with either, but I strongly urge clients to first decide what it is that they are seeking from this investment. And are all partners or investors seeking the same thing from theirs? This is very important because the answers to these questions are the ones that help to determine which model will produce the desired result.

The thing I most appreciate about the BH-PH business is the flexibility. That flexibility affords the opportunity to produce a number of very different investment results, all of which can be very lucrative. One dealer may be seeking a quick turn-around on the cash with a need for some positive cash flow. Others may be content to postpone cash to reinvest and grow. I find one common thread with all of them, though … they all want money back! It is only a question of how much and how soon! This is why I always measure models in this business based on their cash on cash return. Those returns are highest at the lowest ACV’s.

Some will say, “But, Jim, I have plenty of cash, it is profit and equity I seek.” Certainly there are situations where it is important to generate assets and equity. If you are seeking a cash return in less than 5 years, then I would caution against a total unit cost of more than $2500. Over that mark, profit per deal can be huge, but so is income tax and cash investment. Cash payback will be slower – cash on cash return lower. And we haven’t even begun to talk about your risk along the way. If you are new to this business, I’d recommend ‘getting your feet wet’ at collecting short contracts before moving to those over 24 months. 

Dying to hear the bottom line? OK, here it is: Limited cash does not translate to reduced profitability and it certainly does not equate to less positive cash. When managed properly, even small Buy Here – Pay Here dealerships can generate enough of their own cash to sustain growth.

Dealers coming into Buy Here – Pay Here can decide their business path in the same way they make investment choices with their financial planner. The good news is that this is one of those cases where there are more answers than questions. Finding the right answer usually requires a good tool for projecting cash flow and profits. Make no mistake, though … Buy Here – Pay Here has lots of models that generate incredible profit and cash returns!

2014

I am in expert when it comes to setting up car dealerships or dealership departments that offer in-house financing to folks with poor credit. That is my professional space. We’ll get to the Buy Here Pay Here angle. It is not necessary to be an expert in any field to recognize the importance of this particular subject. It is only necessary to be a consumer – something we all share. Whether at the coffee shop, the dry cleaners, or the airline counter, we are all impacted every day by the policies and procedures of business owners and managers. Here is a real-world example from my recent travels:

I rent a car. As usual, I opt out of most every “add-on.” Being fairly familiar with the area, I avoid toll roads as I enter the city since I bypassed the car company’s “toll package.” Good so far. Then, in my return to the airport the next day, due to that all-too-familiar misunderstanding between my phone and me, I hit the on-ramp to a toll road! Dang it! I’m stuck. I don’t have much time to spare so I just swear at my phone and step on the gas. Being an honest guy who also wishes to avoid the hassle and expense that would likely result from doing nothing, I step to the counter and explain my situation, “Didn’t buy the toll package, accidently ended up on the $4 toll road, like to deal with it now, blah, blah, blah.” The guy’s robot-like response “$11 per day, 2-day rental, sign at the box to have $22 added to your card.” I’m surprised, so I protest a bit, “I was only on the toll road just now, Day 2. Is it not possible to only charge me for one day?” The robot responds according to his wiring, “Our system only allows us to charge as it would at the time of the rental – 2 days.” Irritated, but knowing I should not miss the next shuttle, I agree and sign. $22 to cover a $4 toll! Dumb on my part. Really dumb on theirs. Though the practice should be the same even if it was my first rental, it may be a factor to some that I have spent thousands with them this year alone. I have the VIP “car is waiting” membership status. The robot had no clue. 

The point? I am no longer their customer. An appropriate “I-can-see-3-of-your-competitors-from-where-I-stand” decision to take my business elsewhere? Or was it an overreaction on my part? It is not important to know. It is only important to know that they lost me as a customer over a dumb policy that made them $11 (the extra day only). An ever-so-small degree of flexibility would have made them thousands on my future business. 

These “black and white” policy matters affect us every day in restaurants and all kinds of business matters. Businesses need policies and procedures. Buy Here Pay Here dealers definitely need policies and procedures. I simply maintain that in restaurants and in BHPH operations, there needs to always be someone close by who has the authority to deviate from policy when it is appropriate to do so. Having that solution keeps robots from running off business. It is either that or install some sense in the robot’s coding.

While it is certainly valuable to have that person of authority at hand in all aspects of running a BHPH dealership, it is underwriting that is on my mind today. BHPH dealers are in the business of providing financing to those who do not qualify or who otherwise do not fit the conventional sources. BHPH dealers have to provide something unconventional – robots are not wired for that. Plus, BHPH dealers who might make the mistake of employing robots or implementing robotic processes are missing one of the greatest things about BHPH – flexibility! 

Buy Here Pay Here customers have failed too often in their past credit dealings. For BHPH dealers to have success with a poor credit buyer, it is important to get to know the customer – to look past the down payment and credit score and make an important judgment call. Try getting a robot to do that!!! Making judgments about such things can be based on much more than pure gut reaction. Having clear policies and procedures in BHPH underwriting is absolutely necessary. I simply suggest that it is equally important to have someone with a head and a heart who can exercise good judgment to make exceptions when adaptation and flexibility are in order. Few customers fit in the box. Restricting ourselves to only that business can be a costly limitation.

2014

First, I chose for this article the term “in-house auto financing” (IHAF) in a deliberate attempt to encompass all kinds of self-managed auto financing. This is, of course, generally referring to Buy Here Pay Here but our topic today certainly applies to LHPH and/or rent-to-own. Those are all about creating a portfolio of contracts and collecting payments.

Now that I have dispensed of the terminology, let’s dive into business models associated with IHAF. I find that I can generally divide business models in poor credit auto financing into two categories, those with a focus on near-term CASH FLOW and those with an emphasis on growth and EQUITY. In short, some dealer financiers choose the equity-driven approach based on any number of factors. While there are exceptions, these dealers are often well-funded and may bring a lot of net worth to the business. They can afford to delay cash turnover and choose, therefore, to focus on portfolio growth. I spend most of my time with the OTHER folks. Don’t get me wrong, I am a big fan of both equity and cash flow! I just have always condoned a “walk before you run” approach to IHAF and I urge my clients not to expose too much capital as they learn the business. Once they have the hang of it, I am happy to lead the thoroughbreds to the track!

So, I spend a lot of my time with new clients working on pro formas. Working up cash and profit projections always leads to a conversation about pinpointing a turnover point – the first month we can expect to flow positive cash. I expect my clients to flow positive cash, at least on a per-location basis. I expect to reach this mark in less than 24 months, often inside of 18 months. Allow me to move to the math. In its simplest form, I look first to the average reconditioned cost that we have settled on. I then have to arrive at an average down payment to establish the cash exposure at delivery – most often called “cash-in-deal” in IHAF. Now, I just have to know what is a manageable payment amount for the typical poor credit consumer and I am able to project a break-out figure on a per-contract basis. This figure will, of course, have a major impact on the turnover – the date we can expect to bank accounts increase! Naturally, I use a forecasting tool to forecast this on the fly on a portfolio basis. But, if we can settle on a target loan structure, things start to come into focus quickly. 

I have chosen over the years to focus on achieving positive stages of cash flow. There are exactly 3 in my way of thinking. I am sure the college professors have precise labels for these stages but my description to dealers is quite simple. I urge them to think about gross cash inflow in excess of 1) overhead, and 2) overhead + inventory replacement, and last) overhead + inventory + taxes. My clients will confirm that they experienced the sense of relief that I promised when they reach the point of bringing in cash in excess of overhead. That means that dollars flowing out in the second stage are going into earning assets! Comforting! Then, once the operation reaches the second mark, cash accounts really begin to grow. And, finally, reaching that point when inflow exceeds all operating outflow plus the income tax, the dealer’s individual cash accounts begin to grow! Even the equity-focused dealers would like that!

I suppose in a few short paragraphs, you get the sense that I lean toward the models that yield more near-term cash against risk. I really do appreciate both approaches but, since most of my work is with those who are new to the business, I certainly urge dealers to at least contemplate limiting risk in the early stage of the venture. Add to that the fact that I bring folks into IHAF with the expectation that they are going to grow and manage portfolios and enjoy the positive cash flow for many years to come, and you begin to understand why I assert that cash on cash return is critical in poor credit auto financing.

2014

Employees in Buy Here Pay Here dealerships and finance companies handle a lot of cash. Nature of the business. The opportunity and temptation for employees to pocket cash is all too frequent. While I can’t promise my clients I can stop a thief, I can promise to put measures in place to make it far more difficult for the would-be thief to pull it off. Plus, I can certainly help dealers catch a thief before too much damage is done.

There are several steps a dealer must take to limit opportunities and limit loss due to theft. Here are the critical ones:

  1. Archive reports on a regular interval – I suggest weekly. This is something we do for our clients every 7 days without fail. There is tremendous value in that which may become more apparent by the end of this article. To identify theft, it is important to capture and stores reports of receivables, delinquency, deferrals, write-downs, and projections (for the upcoming interval). Where software allows, generating the reports in spreadsheet form is advised – makes for quicker analysis. Of course, every software is different. Terminology may vary as can the content of the reports. But, these reports are critical so I’d certainly be exploring a new DMS if yours cannot produce these with ease. 
  2. Make employees aware that you are archiving. Be as direct or as subtle as you wish, but this is an essential part of making the staff aware that you have the means to catch a thief! Once they realize that you know what every customers balance is at the close of every week in addition to what was past due and scheduled due, employees recognize that lost dollars can be identified.
  3. Limit security rights in the software! Most systems offer that protection. Then, it is just a matter of the dealer themselves retaining certain rights and staying informed about deferrals, write-downs, etc. Of course, some dealers choose a high-lever manager as a designate but, in my approach to BHPH management, no one is exempt from scrutiny and accountability. This is especially true when it comes to plugging the holes that we know are the most likely sources of leakage in this business. Enforcement and accountability are a big subject for another article.
  4. Measure collection efficiency in addition to delinquency and recency. More than 10 years ago, I began tracking dollars collected (filtered) as a percentage of projected or expected payments. It is a number I would not be without in BHPH! This an excellent indicator of portfolio performance and collection results. It is also a great number to create incentives around. Smart employees with too much authority in the system can modify contracts, defer payments and otherwise manipulate delinquency! So, the delinquency reports look good and perhaps the charge-off rate is in check while the bank deposits are running short! The problem is that most dealers can’t identify how short.
  5. Ask questions even when you know the answer. We do this periodically on behalf of our clients. The staff needs to be reminded from time to time that somebody is watching! Closely!
  6. Handle less cash by requiring payment by credit card. Since I know how to limit theft, I’d stop short of anything that required my customer to do something costly or inconvenient. This is an option I see more dealers choosing, though. 

While there are a lot more measures to take, most are software specific. I would add that your software should stamp a unique employee ID on every transaction. In other words, dealers should complain to their provider if the system allows a second user to step in and post a transaction at another user login or workstation without prompting an identifying password. Allowing that is a flaw in the software that we shouldn’t accept. Sorry software providers, but I’m always going to be on the dealer’s side!

2011

When a customer fails to pay and an account goes bad, the first reaction is often to point to the customer as a “deadbeat” or a “good-for-nothing-blankety-blank.” The F & I managers at the new car stores have lots of R-rated names for our customers. Yes, it is true that the customer failed to make the agreed payments, but is that the cause of the default, or simply the effect of a breakdown on the dealer’s side of responsibility? Too often, I see evidence that the dealer failed at an earlier stage of the process to do his/her part to reduce the chance that the customer might end up in that final unfortunate predicament.

The objective is a simple one: to keep the customers on the road to making payments until the account is paid in full. A number of obstacles will arise along the way. The customer places a few of the obstacles in our path, but most of the injuries that occur as we traverse these hurdles are self-inflicted. By recognizing the shortcomings in your own pre-delivery processes, you can avoid many of these headaches and substantially reduce your charge-off losses. Boost your bank deposits by requiring the following in your selling process:

1) Start early.

Your ability to collect effectively in BHPH starts well before delivery – even before the loan closing. Those who might say it starts at the first greeting of the customer are getting warmer. It starts at least as early as the point of purchasing the vehicle you expect to finance. More affordable cars allow for more manageable down payments and terms. This is the dealer’s responsibility. It is a crucial part of the collection process that you control. High payments lead to collection problems with customers who might otherwise succeed. Period.

2) Demand honesty.

Illustrate your company’s business ways throughout your selling process. A salesperson who ignores those little white lies told by the customer does you a great collection disservice. The customers believe they must lie to get approved for financing. Do you allow that? If so, hasn’t the customer just received affirmation that dishonesty is permissible in dealing with you? Inconsistencies in the buyer’s credit story must be brought out and reconciled on the spot. The customer can be made to get honest to get financing. Collections will improve if you require and maintain honesty throughout the business relationship. It will be the customer’s responsibility to be honest in dealing with your company, but it is your responsibility to communicate this requirement prior to delivery. The extra time spent verifying the customer’s claims is time well spent.

3) Communicate expectations clearly and consistently.

Sounds simple enough, right? You tell the manager to tell the customer what is expected. You might even use a statement for the customer to review and acknowledge with a signature. But what does the employee really say at the closing table? Really? Is it the same to every customer? Is the discourse the same with the customer who buys on a slow Tuesday as it is with that last customer on a fast and furious Saturday? You have to know that expectations are communicated clearly before handing over the keys. If the dealership fails in this responsibility, you can never be sure how many of our charge-offs could have been prevented with better communication. This one is your responsibility too and it is solved with training.

4) Leave the door open.

A choice is made at the beginning of every dealer’s venture into the BHPH business. The dealer usually dictates it, but it is sometimes left to management. The decision involves the company’s willingness to aid customers in dealing with payment issues that arise during the contract period. Though this problem solving policy is often unspoken, the choice has been made and the language at the closing table tells the customer where you stand in this area. If you do not clearly express a policy to the contrary as loans are closed, your customers anticipate that you expect them to deal with life’s surprises and manage the payment exactly on time or face the consequences. If this is your approach to payments, then your collection rate is suffering. You are charging off dollars that could be brought to bear with an “open door” policy. The typical BHPH customer will misplace, misappropriate, and just plain miss payments for all sorts of reasons. If they fear dire consequences in these situations, you will be looking for them as they hide from you and their payment problem. You want to hear from them when such problems arise. Make sure they know that before they drive away and you will save most of those troubled accounts before they are too far-gone.

If adopting such an approach would require a significant departure from your present ways, I urge you to be deliberate and consistent as you initiate the changes. The positive impact to your cash flow and profitability will more than justify the time that is spent resolving payment issues. Address these issues by taking on these responsibilities and you will build a portfolio that performs!

2011

In the last issue we discussed a method of measuring success in collections. In this and the issues to follow, we begin to offer suggestions for improving efficiency in collections. 

So, you say you understand your customers and the mentality of the typical Buy Here Pay Here customer. You understand, then, that most BHPH buyers have shown little financial responsibility in the past, mainly due to the fact that they are poor money managers. But do you and your managers understand them well enough to succeed where so many others have failed? Can you succeed, as in collecting over 90% of projected weekly payments and a charge-off rate in the single digits, with these customers?

There are 2 types of customers that make up the “D paper” buyers. The first group is by far the largest: those customers who wish to pay all creditors as agreed but have failed in the past for various reasons – some of which were beyond their control. The second group is comprised of the individuals who seek to take advantage of others in virtually all business and personal dealings. They will lie, cheat, and steal to obtain something for nothing. A BHPH dealership can be highly successful operating with a portfolio of buyers from the first group. Avoid the second! (I’ll tell you how in a future article.) To ensure the dealership of success in collections, one must dig a little deeper. Why has the customer failed in the past? And what can be done to produce better results?

Managers do not need an education in psychology to figure out that BHPH customers will accept more financial responsibility than they can afford. Pull your customers’ credit reports. Note the payment amounts on their past repos, then check their real income at the time. Of course the customer failed! When customers visit a BHPH dealership, they are often in a very difficult spot. Most will sign almost any document presented to get transportation today. Even if they know they cannot afford it, they intend to deal with tomorrow’s reality tomorrow. Today, they are buying a car!

Weekly payment is the biggest reason for people’s failure to pay. Seventy dollars per week, the benchmark payment in BHPH, is too much payment for the average buyer. The typical customer can manage about $300 per month or about $65 per week. Of course there are exceptions, but most accounts above $65 per week are in the danger zone. Structure the deal in a way that the customer can manage it. Then, it becomes a matter of simply requiring them to manage it!

Another factor in a BHPH customer’s inability to pay is the fact that they often CANNOT pay as agreed. It has already been accepted that these customers are poor money managers. Life is full of twists and turns; they will encounter problems. When an unexpected expense occurs, too many poor credit customers cannot afford to handle the surprise expenses and the car payment. Therefore, to collect the note successfully, we must be able to work through those difficulties with the customer.

Once the payment terms are structured in a way that gives the customer a chance to succeed, you are over the first hurdle. Now, how will the sale be closed? When the customers drives away in the car, do they know exactly what is expected of them when they first encounter a problem making a payment in full or on time? When they cannot pay, are they fearful? Will they hide? Or will they call us before we call them? If your customers are hiding, your collection mechanism has a defect. Your staff may be using stern or threatening language that sounds much like that used by previous unsuccessful creditors. Or they may not be communicating anything to the customer, leaving them to assume that your dealership is no different than those other creditors – heartless and inflexible.

We train dealers and their managers to require customers to contact the dealership right away if they have a payment problem. The customer is also required to be – and verified to be – telling the truth about their payment problem. They will not always be able to pay on time, but they must always be truthful in order for us to agree to continue the business relationship. When the customer is forthright, we must bend to accommodate their life changes.

Bleeding heart, you say? Perhaps, but I get calls from dealers with bleeding bank accounts. I often find that no one taught them this fundamental message that we teach and constantly reinforce with our clients. A “payment today or car tomorrow” policy produces too many cars, and subsequent charge-offs, while a “bend without breaking” policy is the secret to collection success with poor credit customers. A graph of delinquency may look like a sketch of the Appalachians, but the stream of cash is flowing!

Most poor credit buyers want to succeed. Help them to do so and you will bank more of the profit that you book!

2007

Are you missing customers due to credit qualification? Thought so! And are you having to scratch and claw to hold any margin on new cars? Again, had a hunch! Fighting for gross and missing business day after day must keep you on a steady diet of Pepto Bismol! Buy Here Pay Here may be your solution! Sub-prime financing can certainly create the volume and gross to help you get off the pink stuff! I find that many new car dealers have contemplated BHPH knowing the size of the market and demand, but I also find that daydreaming on the matter doesn’t last very long for most of them. This is because many dealers are apprehensive about moving into poor credit financing due to some very common fears and a general lack of understanding.

If you are not already in BHPH, it is likely because you, 1) are overestimating the capital requirements and related risk, and/or 2) are not aware of the collection methods that have proven to convert BHPH profits into cash at a surprisingly high rate. Both are common roadblocks for new car dealers. My experience has been that most dealers think they would need a 7-figure bank account to enter the business of in-house financing. And if they have that, they wouldn’t dream of loaning it to folks with bad credit since they wouldn’t know how to get them to pay when others had failed. These are common misconceptions.

As far as the capital requirements, the amount of funds required varies by business model, but starting a successful BHPH operation with less than $300,000 is absolutely achievable! In fact, I have aided dealers in start-ups with half that, and have been involved in several that required less than $250,000 to attain that “breakover” point where the cash inflow exceeded the outflow. No doubt, the business model executed in those cases is not for everyone, but positive cash is positive cash! Those BHPH dealers who attain positive cash early are able to move their Pepto to the back of the medicine cabinet.

Naturally, the higher the cost of the cars, the greater the capital investment and risk. And, of course, the gratification of positive inflow is delayed with more expensive units. I won’t take much of your time here since I covered this in prior articles, but suffice it to say that there are multiple BHPH models out there with varying degrees of risk and reward. Sometimes, I assist clients in choosing a model that fits their cash, but other times I am asked to run models to help determine how much cash will be required to pursue the model the client has in mind. Point being that if you are receptive to all business models, it may be possible to open an efficient BHPH dealership with less cash than you think. I suggest having a professional run some cash flow projections.

Almost all BHPH models produce incredible net profit and equity results right out of the gate, but converting BHPH profit into cash is the name of the game! This brings us to that second point where fear of the unknown becomes a roadblock. The idea of building a business that relies on collecting from “D-paper” buyers causes many new car dealers to tuck and run. On the surface, it seems like a huge undertaking. Here is the reality: BHPH, like any business, is only difficult when done wrong. But when proven methods are employed, a very high percentage of poor credit buyers will pay as agreed. Success is in the structure! The key is learning how to making the deal fit for the customer and then implementing measures to hold them accountable to the agreement. It works well when you make it something the customer can manage and then just make them manage it! Good structure and proper training are keys to getting paid and limiting loss.

Sure, Buy Here Pay Here dealers experience loss – some more than others. And just like in your 20-group, good operators do well while others struggle in their business due to neglect or lack of accountability. Bad debt losses are a part of the BHPH business, but they can be controlled with effective management. Since such losses will always be a part of the financial statement, margins simply have to be monitored accordingly. You plan for it and you overcome it. Buy Here Pay Here is merely a numbers game. But unlike the games in the casinos, you have a great deal of influence over the outcome in BHPH. The fact is that the BHPH numbers work very well! You just have to know how to make the numbers work in your favor. You do this by building in sufficient margin, limiting risk, and optimizing inflow. 

Need another reason to consider Buy Here Pay Here? Here’s one more to ponder: helping people! No, I am not suggesting that you open a BHPH operation with entirely charitable intentions. But there are very few business that you can be involved in that produce more cash on cash return on investment while helping so many people who need it. There are literally millions of wage-earning car buyers out there who can manage a payment on a properly structured loan, but who are not eligible for conventional financing. Perhaps you will become the dealer who profits handsomely and helps many of them along the way.

If you were to enter BHPH, the truth is that you have a great advantage as a new car dealer over the independent competitor or would-be competitor. You have a built-in supply of trades, existing inventory acquisition methods, personnel support, and service solutions. Simply put, it will cost you less to operate a BHPH site than it will an independent with a stand-alone dealership. And most of the independents I am familiar with are netting 12-19%! And yes, that is after bad debt write-offs. What might you do?! Perhaps the time has come to take a closer look at Buy Here Pay Here!

You already know that Buy Here Pay Here is much more about financing than it is about cars. It is certainly not the same as the car business! But being different does not mean it is difficult. Don’t let a fear of the unknown prevent you from cashing in on the most profitable segment of the car business. Adding BHPH as a profit center in your operation may produce lots of gross profit and even cut some expenses by saving you countless dollars on antacids! 

2006

So far in this series, we’ve projected capital needs, identified the right manager and location, and chosen software and type of inventory. We are definitely eager to hang the signs and get started! We just need to make time to set some ground rules before we get too far along. We have to write the book that will become our blueprint for success. Writing a policies and procedures manual is an important endeavor in any car dealership, but given the added lending and collection elements associated with sub-prime financing, it is especially critical in a Buy Here Pay Here operation.

Rather postpone the unexciting task of writing that policies and procedures manual until a later day? First consider a few scenarios that BHPH managers may face in the course of business:

  • Just before the loan closing, an applicant mentions that the vehicle he is buying is for his girlfriend who lives an hour away. Will you approve the loan for him alone?
  • A couple wants to buy without trading their present vehicle, but one of them has a suspended driver’s license? Done deal?
  • A young Hispanic fellow and his brother have pay stubs and the required down payment but both have driver’s licenses issued in Mexico? Do they qualify at your BHPH dealership?

And this is just the first day! Do you have a policy in place to address these? If so, has your new manager been informed of the policy? Who is designated for making such decisions in your BHPH store? While there may be a “right” policy in each of these scenarios, what is most important is that the policy manual expresses your business wishes. It is, after all, your business and the manual ensures that the business is going to be operated in the manner you see fit.

Before we dive in any deeper, let me take a moment to clarify the difference between policies and procedures. Think of policies as the code of behavior or the adopted manner of handling common situations. Procedures, on the other hand, are actual processes or steps required to execute certain routine activities or tasks. You need both in any business, but it makes for a better reference manual if the two are in separate sections.

We cannot tackle in these few pages every single situation that will require a policy in your BHPH dealership. However, I can certainly help you anticipate those areas where you may need a policy and direct you in crafting a manual that is effective. You can complete this undertaking without developing carpal tunnel disease!

Ready to start writing the manual? Think first about the prologue, if you will. You should state in the introduction to the manual how you expect the manual itself to be used and you should specify the procedure for resolving issues not addressed in the manual. Generally speaking, you should indicate that:

  1. Management expects the policies in the manual to be followed;
  2. There are consequences for deviating from the policies and those consequences may include dismissal;
  3. Permission to deviate from any policy must be obtained from an immediate supervisor;
  4. Requests to amend any stated policy should be presented to an immediate supervisor in writing;
  5. Changes to the manual can only be approved by the owner or his/her designate.

This is fairly mundane stuff, but it is necessary to spell out to new employees that the policy manual in your dealership is meant to be more than a dusty binder. It is the backbone of your business and all employees will be held accountable to the ground rules it contains. 

Child psychologists universally proclaim that young children find comfort in having boundaries. Your employees are no different in that regard and the best employees will appreciate knowing their limits and will adhere to the rules. For those who test the limits, there has to be a predetermined method of holding them accountable. You simply need not waste the time and paper required to create a manual if you are not prepared to monitor the compliance and take swift disciplinary action where necessary. The policies are in place to spare the company from avoidable loss. It is important to state the policy and demonstrate that you will enforce it!

In all of the language contained in the P&P manual, it is helpful to use verbiage that is generic or universal. In other words, you should avoid using the names of actual supervisors or managers. This serves you well as you grow and very subtly reminds all who read it that the manual outlines the way the company will function with or without “Bob” or “Mary.” 

The policy manual that I developed for our dealership addresses each topic in a fairly complete way. That is not to say that the manual itself is 100% complete; nor do I anticipate that it ever will be. Our business is growing and our needs change as we grow. The policies and procedures manual evolves as we progress. We simply cannot write a policy or procedure for everything that occurs at the dealership. What we can do, however, is hire conscientious individuals and 1) teach them our business philosophy, 2) provide them a foundation of training that enables them to make appropriate and consistent decisions, and 3) write a policy or procedure for everything that seems necessary and makes sense. 

For consulting purposes, especially for use in startup dealerships, I developed a policies and procedures template. The template is divided into sales (including the financing/approval process), collections, inventory management, and daily operations. I typically counsel the client with the “fill-in-the-blank” workbook as they write the policies that correlate with their business plan. For example, one blank to be filled in is the spending limit for reconditioning expense per vehicle. Once completed, the policy specifies who has the authority and to what limit per expense and to what aggregate limit. This is an example of a rule that could cost a dealer many thousands of dollars if left unspoken or if just ambiguously spoken.

Policies should be all about keeping honest employees honest. To do that, the language has to be very specific. Further, the policies should be written in a way that promotes growth as employees prove themselves to be worthy of increased responsibility. Expanded authority may be appropriate when it comes to buying vehicles or disposing of wholesale units or approving new customers, just to name a few examples. The policy manual ought to be able to expand accordingly rather than be tossed out the window as employees gain experience. 

Besides the great feeling of knowing you are helping people who need it, one of the best things about in BHPH is the chance to “be the bank” and benefit from the flexibility that comes with that freedom. A properly drafted P&P manual should avoid stifling the dealerships growth potential. It can do this by defining boundaries that are sufficiently broad to allow well-trained employees to draw on their creativity and, in doing so, help the dealership achieve its full potential.

Start with an outline and keep in mind that your manual must be specific, sufficiently broad, and expandable and you will be pleased with the result. Then simply monitor the obedience and be prepared to take enforcement action whenever necessary. So, while I am sure there are plenty of things you can think of that are far more exciting than writing a policy manual, it may help you to stay the course when you recognize that a well-written P&P manual saves some serious dollars. Not hundreds, not thousands, but tens of thousands of dollars! That is enough money to get excited about! Perhaps you can make the time after all!

2006

Ah, the big question … how much cash will it take to open a Buy Here Pay Here dealership?! It is an important one too because this is a business where people go broke while showing big margins on their profit and loss reports! When this question comes up in the seminars, the attendees usually get my long-winded response. You get the quick answer today! Most Buy Here Pay Here start-ups will require from 250K to 750K to reach that all-important “turnover” point where they begin to generate positive cash. Why the disparity? Sales volume, cash down, cost of car, etc, etc, etc. Overhead of the operation is obviously a significant factor as well. There is a broad range of figures when it comes to dealers’ cost of operating.

It is entirely possible to start a very successful BHPH operation with less than 300K. I have consulted dozens of start-ups in several states who turned positive with capital investment in the 200’s, usually in 10-15 months. And, despite what you may be hearing, there are sources out there for Buy Here Pay Here funding. Some of the same reliable sources are funding in the same way they always have. Some offer payment stream advances or buy contracts in bulk. There are point-of-sale funding options out there, too. You just have to know where to look. Is the money more expensive than your local bank? Yes. Should you get all the money you possible can from your local bank first? Yep. Will your local bank be excited about lending to a BHPH operator? Nope. So, you may need multiple sources to capitalize your plan. As for the expensive money sources, I always urge startup clients to explore the idea of using those programs short-term in their plan as opposed to taking a partner for life. Using this money as a bridge might allow you to use less of your personal cash and still build the larger BHPH operation that you envision. For now, just know that the money is out there!

Now back to the question of how much you need. First, understand that I work with a lot of cash flow and profit projections. My clients are often surprised at how much impact a change such as an increase of $300 to the average unit cost can have on the projected capital needs. Consider a dealership selling 30 per month at an average unit cost of $2000. The cash flow projecting tool that I designed shows that when that average is increased by just $300, the cash required to turn positive increases by $119,891! And the time to reach positive cash is delayed by 7 months! That is why the answer is not always a quick and simple one. 

So, how should you decide your model? Should you decide the model and use that information to determine how much capital to plan? Or are you in the same situation as most of my clients, choosing a model based largely on the available cash? I can help with either, but I strongly urge clients to first decide what it is that they are seeking from this investment. And are all partners or investors seeking the same thing from theirs? This is very important because the answers to these questions are the ones that help to determine which model will produce the desired result.

To answer that question, I should explain that the thing I most appreciate about the BHPH business is the flexibility. That flexibility affords the opportunity to produce a number of very different investment results, all of which can be very lucrative. One dealer may be seeking a quick turn-around on the cash with a need for some positive cash flow. Others may be content to reinvest and grow. I find one common thread with all of them, though … they all want money back! It is only a question of how much and how soon! This is why I always measure models in this business based on their cash on cash return. The lower the ACV, the higher the cash return on risk. That is just simple mathematics driven by the average payment compared to the average risk or cash exposure per contract. This does not take overhead into account nor should it. This is a measure of loan structure and how well the model itself works. You can then examine your cost to operate against those figures.

Some will say, “But, Jim, I have plenty of cash, it is profit and equity I seek.” Certainly there are situations where it is important to generate assets and equity. If you are seeking a cash return in less than 5 years, then I would caution against a total unit cost of more than $3000. Over that mark, profit per deal can be huge, but so is income tax and cash investment. Cash payback will be slower – cash on cash return lower. And we haven’t even begun to talk about your risk along the way. If you are new to this business, I’d recommend ‘getting your feet wet’ at collecting short contracts before moving to those over 24 months. 

Anxious to hear the bottom line? OK, here it is: Limited cash does not translate to reduced profitability and it certainly does not equate to less positive cash. When managed properly, even small Buy Here Pay Here dealerships can generate enough of their own cash to sustain growth. I have to leave you with an example to ponder … suppose you have 300K to invest in BHPH contracts. Put overhead aside just for a minute anticipating it will be about the same in either example. Now suppose you can get $500 down on a car you purchase for $2000. 300K funds 200 contracts, right? Figure the payment from the customer will be $280 per month. $56,000 in monthly payments, correct? 18.7% of your investment/risk in the first month. Hmmm. Now do the same 300K at $3000 per unit and assume a higher down payment of $800 and a higher installment of $325 on the nicer vehicle. Result is 136 contracts and $44,200 in payments. Just 14.7% of the 300K risk. Interesting. That is all simple enough. You probably did that on a notepad already if you are considering BHPH. Here are some things you may not have considered: Can the customers really do $325 per month well? How many poor credit buyers can save up $800 down? How might a lower volume at $800 down cause you to eat up cash with overhead as you wait for your portfolio to build at the reduced volume? This is where an expert pays off. If not me, call another. Choose the plan that is right for you!

Dealers coming into Buy Here Pay Here can decide their business path in the same way they make investment choices with their financial planner. And this is one of those cases where there are more answers than questions. Finding the right answer usually requires a good tool for projecting cash flow and profits. Make no mistake, though … Buy Here Pay Here has lots of models that generate incredible profit and cash returns! With today’s market being so broad, I suggest you get advice from a pro to pick the one that’s right for you and join the growing number of BHPH dealers!

2006

Location! Location! Location! We’ve all heard it and we all know it is an important consideration for any business. Buy Here – Pay Here is certainly no exception. There are several factors to consider in choosing the best location for your BH-PH facility. Since the considerations are virtually the same for sales and collections, I’ll presume here that both are taking place in the same establishment. Among the factors are convenience, accessibility, and proximity to similar and complementary businesses. 

First, recognize that day-to-day life can be a rat-race! Car owners and car-buying prospects are busy people, including those with bad credit. However, good credit buyers and poor credit buyers don’t necessarily travel the same routes. Generally speaking, poor credit buyers often live in a different area and work in a different area than those with good credit. You want to be on the right travel route. To identify that route, it is essential to pinpoint the apartment complexes and subdivisions where your target customers are most likely to reside. Then, do the same with the most prominent labor-driven employers. Add where poor credit customers shop and you are well on your way to choosing the precise location for a successful BH-PH operation!

Next, consider a location that is highly visible and accessible from the travel route you have chosen. In BH-PH, we have to be mindful of two groups – prospective buyers and those making payments. I urge clients to select a location that is plenty visible to prospective buyers and easily accessible to the regular payment visitors. Again, people are busy! Add to that the fact that poor credit buyers will take advantage of any excuse to skip a payment or pay it late. Your location cannot add another reason to that excuse list! You want a location that is easy to see and just as easy to access. If possible, avoid facilities on streets that prohibit access from both directions and those with traffic moving faster than 35mph. While I would be the first to acknowledge that a well-run business can become a destination business even in a less-traveled location, I know too that every such business needs time and sufficient traffic to establish that identity and reputation. Why create an obstacle to overcome in a start-up business? Pay a few extra bucks if necessary for a spot that is visible and accessible!

Now, let’s discuss the business “corridor” that is most suitable for Buy Here – Pay Here. To do this, we should revisit the differences between poor credit buyers and those with good credit. Perhaps it is most instructive to think about some of the businesses in your community where you are most likely to find buyers with lower income and lower credit scores. Pawn shops, flea markets and thrift stores come to mind. Others include check-cashing offices, payday loan companies, and furniture rental stores. As a very general rule, these are the types of businesses that are frequented by the more disadvantaged individuals in our society. This is your target customer so locating your facility among such businesses makes good sense. Your customers are frequenting these businesses!

You may also be faced with deciding whether to situate your business among your would-be competitors on “note-row” as it is often called. Many of the larger communities have them – a street or area where several BH-PH lots have set up shop. Most of us have seen that one street where flags and balloons flap in the breeze and reader boards promote “No Credit Checks” and “Your Job Is Your Down Payment.” It may be appropriate to buy your own flagging and nestle in among them. Here’s how I advise my consulting clients to choose: “If you intend to use the same business approach as the rest, consider another location. What else could set you apart? But if you are committed to being better on at least the most important levels, get right in there with them! Having a unique marketing angle and an effective means of delivering that message will allow you to get noticed. Banners and streamers can generate traffic almost anywhere, but it is your handling of those customers that enables you to rise above your competitors and enjoy sustained profitability and positive cash flow in Buy Here – Pay Here.” 

When it comes to the grounds and the structure itself, there are only a few considerations: expected inventory turnover rate; security; and image. The first determines how much real estate you’ll need. Keep it about transportation and keep it fresh and you’ll need very little space – fewer than 20 cars. Yes, fewer than 20 cars! Choose a business plan driven on vehicle selection and your needs increase. This subject, one of my favorites, deserves much more attention but I am told that the printing press has a limited supply of ink so we must move along! The second consideration, security, is fairly self-evident. The perimeter must be secure after hours and the interior of the structure must be conducive for internal controls and safety. I suggest focusing more on the safety of your employees than the protection of your inventory. Image is last but not least and must be considered when choosing a facility. Again, this subject could quickly become a novel, but suffice it to say that your image speaks volumes to your particular segment of a society that too often has its mind made up about Buy Here – Pay Here dealers. As an upstanding BH-PH operator, you can strive to overcome the preconception one visitor at a time. This can certainly be accomplished in a modest facility since the visitors will derive more from the level of professionalism and how the facility is maintained than they will from the lavishness of the structure itself.

We know that margins in BH-PH are broad. We know that the poor credit market is broad and growing. We have always known that location is a critical component in establishing any successful business. By knowing how to intersect convenience, accessibility, and proximity to similar businesses in choosing the right BH-PH location, we have taken one more step toward getting a firm grip on the most profitable segment of the car business!

2006

So far we’ve covered some basics of the Buy Here – Pay Here business and I’ve provided some direction on choosing a business model. Now let’s move forward with taking some preliminary steps to opening the doors on a successful BH-PH operation. There are several early choices that rank very high in importance including location and software, but choosing the right manager certainly tops the list. Here are some things to consider when choosing an effective BH-PH manager.

First, in my view of this business, managing a BH-PH operation is not rocket science! That is not to say that it is an easy job. Rather, I simply mean that it is not a difficult job to learn. There is a step-by-step approach that can serve any manager well regardless of the size of the operation. So, what you need first is a manager that can learn and follow the procedures you’ve adopted. Based on my experience in working with dealers and their managers across the country, finding someone who can follow directions is apparently not always as easy as it sounds!

Next, I urge owners and supervisors to seek an individual who understands the importance of and can demonstrate some initiative. A go-getter, if you will. Someone who, with a well-defined mission with specific objectives and boundaries, will get to work! Sure, they’ll need supervision and they’ll have to be held accountable. And, yes, they’ll make a few mistakes. But they won’t require day-to-day “hand-holding” or input from you when it comes to day-to-day management decisions. We all want managers who will handle matters in a way befitting the title on their business card and manage according to the established guidelines. This is the key to growth – everyone on the team functioning to their full authority and ability. 

Third on the list is discipline. Several other traits I look for in a top-performing manager fall under the heading of being disciplined. Being punctual, organized and even being consistent in dealing with customers are all functions of being disciplined. And discipline is definitely required of the manager who will participate in buying!

Moving on to those attributes that are specifically required in Buy Here – Pay Here, I will focus on the most common type of start-up operation – those that start with sales and collections in one facility. The managers in these dealerships wear many hats and their management skills are thoroughly tested as the business grows. The most successful managers show up for work early equipped with at least an open mind if not a positive attitude. Let’s face it – the manager of a BH-PH operation is making finance recommendations or decisions regarding buyers who have not shown much financial responsibility in the past. A negative or apathetic manager could definitely turn too many buyers away. Of course, it is important to strike a balance, but I urge clients to choose the manager who tends to look for the potential in everyone.

On the collections side, the most valuable characteristics are empathy, tenacity, and consistency. Merriam-Webster defines empathy as “… being sensitive to … the feelings, thoughts, or experiences of another.” Not all those who apply for your management position possess this important trait. Without going into a long dissertation on business philosophy, suffice it to say that it is imperative that those entering BH-PH recognize that nearly every customer in a poor credit portfolio will suffer a setback or two during the term of their loan. Empathy will come into play. The manager’s or collection supervisor’s ability to work through the issues and save the loan is often decided based on his or her capacity to relate to the customer, communicate effectively, and find a solution that is acceptable to both parties. Managers who are too stern and inflexible will lose more accounts, causing the dealership to suffer in both profitability and cash flow. Naturally, the ability to identify with customers proves valuable on the selling side as well. Now I know very well that there are plenty of individuals in the new and used retail business that can adapt to a different type of work, but generally speaking, employees from the new car business or traditional finance business are NOT going to be the most successful BH-PH managers in the long term. There is just too much “untraining” that has to take place and it rarely works out well. Someone with relevant sub-prime experience can do well, but those who are new to the business and who only know the way you teach them tend to reach the top first. 

There are no doubt plenty of management styles that can work in BH-PH. The style that works best in your operation may be decided in part based on your business philosophy. If you are considering a BH-PH operation in your market or perhaps expanding to a new community, you’d be wise to scan the area for good management candidates before you exhaust too much time scouting for a location. Too often business owners act because they are excited about a new location, but they end up suffering months of poor performance by choosing the wrong manager. Seek someone who is able and willing to follow instructions, has a history of “taking the bull by the horns”, is well-disciplined, and does not consider themselves “above” the customers. This type of individual has shown to produce the most impressive results on the front-line of Buy Here – Pay Here!

2006

I am an independent small business consultant specializing in Buy Here – Pay Here. Independence has its advantages. I do not have sponsors to satisfy or vendors that I endorse. Nor have I ever accepted commissions for referrals. Once I am familiar with a clients needs, I only refer them to vendors in the interest of having a satisfied consulting client. So, you can put away your checkbook! This is not a sales pitch – this is free advice compliments of WOSF Magazine! In this article, I do my best to provide you an independent perspective on BHPH software – the heartbeat of every successful operation. Having visited BHPH dealerships in 18 states, I can tell you that not all dealership management systems (DMS) are created equal. Here are some considerations for both managers and their owner/supervisors to consider along with some key questions to ask the salespeople when sizing up their product.

First, it is important to recognize that every BHPH software has its bells and whistles, but I suggest you sort through the sales pitches out there and focus on the nuts and bolts. Think carefully about how you and your personnel will use this tool day-in and day-out in your multi-million dollar business. There are some basic components you should expect from your DMS, especially in Buy Here – Pay Here. Let’s divide those needs into inventory management, sales, collections, security, operational management, and accounting.

Inventory management is very fundamental and most systems handle this area just fine. One area that has proven to be a problem with some is the “unconventional” acquisition of inventory, namely trades and repos. Specifically, does the software add such units to the inventory “internally” or is the user required to stock them in? In the case of a repo, does the vehicle become part of the inventory at the point of repo or at the point of charge-off? If it is the latter, how are you to track and manage those “pending” or curing repos?

Sales is an area where most of us can anticipate the need fairly well. All BHPH software can handle the basic steps: stocking in the unit, pricing, quoting terms, and even selling/financing. Piece of cake! However, the real test is whether or not you can perform these steps as quickly, fluidly, and creatively as you wish. A huge key to success in Buy Here – Pay Here is establishing a payment schedule that is a good fit for the customer. You and your customer benefit from your ability to contractually schedule deferred down payments, multiple payment streams, and even balloon payments where necessary. If you can formulate it, consumer laws allow it, and your customer can better handle it, your software should not prevent you from doing it!

Collections are job one! Software has to help us do that job well! I have seen a variety of collection managing methods that work well. Each method has different needs. However, there are needs they all have in common. The effective management of customers’ status with centrally accessible “electronic” notes is critical. Updated status in note form for all staffers to see! Additionally, the system should clearly display, ideally in a single screen, the status of an account: last payment date and amount, amount past due, amount and date of next payment, and any special approved arrangements. Some products offer the option to enter extensions in way that enables the user to capture those arrangements on reports. With proper training, this can be a nice feature, but it is not essential when good note management is available.

Information shown on payment receipts is worth a look as well. Customers appreciate a receipt that displays their name and account number, the date, payment amount including principal and interest split, and the balance after the payment. Most BHPH software will do that.

Also, surprisingly, not all DMS systems can accommodate principal payments! It will be necessary to do that on occasion, so your software should handle it with ease. If your customer comes into some extra cash that they wish to pay on their account, the result should not have to be that they pay several payments in advance and are therefore not required to pay again for weeks or months. Ask your software salesperson to show you how it is done in their system. There should be no need to modify a contract in this scenario.

For those using or intending to use payment protection devices (PPDs) to encourage payments electronically, “integration” will be of interest. I use the quotes to denote the loose manner in which that word is used on this subject. My definition is an easy one to form into questions for the salesperson: “Will your software reveal the code from my PPD provider once a payment is made? And will it generate that code on receipts? Can I view the PPD code without leaving your software?” The answers to these would indicate to me an actual integration which avoids double entry of payments. The DMS providers can walk prospects through this process during a demonstration. Of course, the PPD providers can supply you with the names of any affiliated BHPH software companies.

Security is so important in Buy Here – Pay Here and it starts with your software! I am not talking about encryption keys or internet firewalls for preservation of privacy or virus protection. I am referring to the security of your hard assets: cash, receivables, and inventory. Good BH-PH software helps you as a dealer/owner to deter theft in a number of ways. It does this with user passwords by, 1) associating users with transactions, and 2) restricting access to certain transactions and functions only to users that you have authorized. Such security restrictions should be the backbone of any DMS in your facility. For example, the authority to reverse or delete a payment, delete a vehicle, amend a contract, or charge-off an account should be strictly regulated in the software by YOU or your most trusted controller. Of course you hire honest people, but good software helps you keep honest people honest and keeps you in the know about irregular activity. 

Regarding passwords, you’ll want to ask specifically if the software prompts for a password as a transaction is posted or only at the point the user logs in. In the trenches, it is just too common for users to walk away from their PC while logged on, making the user ID stamp on reports virtually useless.

Smoothly performing Daily Operations in the dealership is vital to your efficiency and employee morale. Among the things to consider in this area is the DMS’ printing method. Sounds mundane enough, but the method of printing in a car dealership is directly related to the employees’ blood pressure level! Ask any F&I manager printing those multi-form contracts on pin feed printers! The good news is that some BH-PH software companies now offer laser printing. It is definitely a question worth asking. With those offering laser forms, the forms are typically programmed internally according to state requirements and, once generated, they are stored in the system for future viewing or reprinting. The forms are designed and aligned internally in most cases, so there is no form adjusting necessary on the dealer end and the printed forms are very clean. Mind you, some will consider this as one of the bells and whistles, but with laser printers now very affordable, I look for it to become the standard.

For those contemplating a Related Finance Company (RFC), the ability to manage multiple portfolios may come into play. This is an important feature that may be of benefit to larger operations. In some cases, lenders may also take a security interest in a pool of contracts, creating another need for segregating portfolios. The ability to easily manage the transfer or sale of contracts at a discounted rate will also be of value to those selling contracts to a third party. 

On the subject of Networking PC’s in the office, let me do the software companies a favor and explain that networks are really a hardware matter. While some software companies may provide some initial guidance in this area, I can tell you from experience that networks are very difficult to set up and troubleshoot from a distance. What you do need to ask the software salesperson is whether or not their product is Windows based. There may be a few DOS-based products still sold in the market. Find a local network specialist to be sure, but I believe your DMS network capabilities will be limited or nonexistent without a Windows product on a Windows operating system.

Accounting in Buy Here – Pay Here is a bit more involved than conventional retail. I am not going to pretend to understand every aspect of it. I do, however, have a much better understanding of the need for an accounting solution than I once did. This improved understanding comes from managing the consulting department in a BH-PH software company for 3 years. Add my on-site travels and my present ownership and I have definitely honed my BH-PH accounting skills. What did I discover? I learned that I need an accounting solution from my DMS and likely so will you. This is not because of limited knowledge, but rather due to the time involved and/or professional expense associated with preparing the financials. There are good solutions out there that can save lots of time and frustration. So, based on my experience, you have two accounting options from DMS providers: 1) internal accounting built by the provider, or 2) an export feature in the software designed to compile data in a format that can then be imported into various third party accounting products. Each BH-PH software company who provides a third party export will have chosen to do so in a way that is compatible with all or some of the providers such as Peachtree, Intuit/QuickBooks, and Great Plains. In the case of the first option, internally built general ledger accounting, I highly suggest you speak directly to references using the DMS accounting feature or module and even ask them to speak to their controller or CPA. Ask if check writing/printing is managed in the DMS. What about payroll? And ask the DMS salesperson if you can see the user training manual before you buy? 

As a consultant and analyst, you probably guessed that the subject of Reports is very important to me. There are certain reports that are essential in BHPH for loss analysis, tracking collection efficiency, and monitoring transactions known to indicate possible negligence or theft. Ask your software salesperson for sample reports on cash inflow (by type), repo/charge-off loss analysis, transaction logs, deleted vehicles, deleted payments, amended/modified accounts, detailed delinquency, recency (days to last payment), expired insurance, projected payments, and adjusted gross profit (all profit or loss from operations before expenses). This last one is an excellent basis for a manager’s bonus plan. More on that in a future article. 

I wouldn’t consider software for my business that wouldn’t generate a report of payments that are contractually due for an upcoming period. It is that important! Every BHPH owner, manager, and collector needs to have access to a report that shows exactly who is expected to pay and how much during an upcoming period. I could write for pages on how to use this information in managing collections and tracking efficiency, but as David Letterman says, “That’s not why you called.” So, for now, just make sure your software can project payments that are contractually due for a future period and look for more on the subject in a future article. 

For my fellow analytical types, I know you’ll expect the ability to export all reports to Microsoft Excel. Thankfully, this is now fairly standard. The ability to create custom reports and export the results into Excel is a must as well.

There are bound to be lots more reports that may interest you, but the ones that are listed here are essential to good management and theft control.

How Updates to your DMS occur is the final consideration. If your software resides on a local server, will you receive CD’s by mail? Or will you obtain updates via the internet? And will all users across the country receive such updates at the same time? This can be a real problem when you need support. Otherwise, can you be sure that everyone on the DMS’ technical staff is versed on support for your version? Will the company keep up with compliance changes in your state or will that be your responsibility? And if there is a compliance change, will they reprogram forms? At no charge? 

There are web-based DMS solutions in today’s market place as well. This means you essentially log on to a website and therefore utilize the only version of the software available. This also means you are constantly up-to-date and that you can access your software and perform all functions from anywhere on the planet with internet access. There is no “backing up” of data. All data resides with the web-based DMS, but export features allow the user to capture all essential data for peace of mind.

When it is time for you to choose a Buy Here – Pay Here software, you can rest assured that there are some very good products out there. The industry has come a long way technologically in the last decade or so. Plus, a rapidly growing and competitive market place has prompted a lot of progress among DMS providers. You and I as dealers are the beneficiaries! Just keep a focus on those nuts and bolts and you will find the software that is right for your well-oiled BHPH machine!

2006

What kind of inventory is best for Buy Here Pay Here? That is a great question that is debated in BHPH circles across the country. Let’s settle it right now, shall we?!

Let me say right up front that there are likely individuals in the BHPH industry far wiser than myself. And there are certainly some that have been in the business longer than I have been. So what makes me qualified to settle this age-old debate? Very simple. I own a calculator!

You see, choosing the right inventory for BHPH is a matter of basic mathematics. There are some fixed, or at least limiting, values that make part of the decision for us. We just have to do the math! In this issue I take you back to Algebra 101 and solve a basic equation by plugging in some givens and backing into the answer we all need. If you read the first two articles in this series, you heard me assert that Buy Here Pay Here is about cash flow and profit – in that order. Keep that firmly in mind as I illustrate in the paragraphs to follow how planning for cash flow dictates what inventory should sparkle on the front line of your BHPH dealership.

Back to the math problem. I said there are limiting factors in this equation. The first two are down payment and income. Yes, I know the amount of down payment will vary by market and to a degree by the type of vehicle in question, but the average down payment will have a limit in every market. It is a given that the typical BHPH buyers’ disposable income and resulting down payment is not unlimited. This will be true regardless of the age of the car, regardless of the selling price, and regardless of how skillfully you ask for it. Down payment, especially in the poor credit population, is limited! I can now make the same argument when it comes to payment/installment amount. We will explore later where that number should stop, but we just have to accept for now that there is a point where the customer fails on payment amount. So, if the down payment and installment amount are to limit us, then we’ll have to collect the receivable over some now-to-be-calculated term. That leads to one more finite number: life expectancy of the vehicle. No, I don’t know what that number is and neither do you, but we know there is a stopping point with every car. Oh sure, the customer will sign a long contract with the best intentions. But the best intentions won’t make the car last any longer or guarantee that the customer will love the car throughout the term.

There are other reasons to limit term even though the customer won’t fight you on it. You can set a high selling price, add lots of gross to your profit and loss report, and pay income tax accordingly. But if you are to own your own BHPH contracts, you see the danger in piling on too much “uncollectible” gross and paying income tax on too much “unbanked” profit.

Still thinking cash flow? Good! Let’s turn to the cost of the car. What ACV is right in your market? To answer that, we must settle on a basic point until we examine it more closely in future articles. To generate positive cash flow in Buy Here Pay Here, you’ll need enough paying accounts to cover your overhead and cost of sales/inventory replacement. Therefore, you’ll need the kind of inventory that sells in sufficient quantity to achieve that number. And you have to hit that mark with the available capital. Plus, generate enough gross margin to provide sufficient return on investment! See, I didn’t forget about the profit element! It has to be there!

But you’re thinking “What kind of car already?!” As we say in Texas, “Hold your horses, friend!” We’re getting there. We just need to take a deeper look at gross margin or rate of return to finish out this thought process. These are measures of your gross to sales or gross to cost ratio and they are very important numbers in BHPH, yet they are disproportionate in too many dealerships. Here is another BHPH factoid you can write down in permanent ink: Gross margin (% of sales) is highest on the lowest ACV’s. Since it is just another way of comparing the same set of numbers, rate of return (gross to cost) has to be highest on that vehicle as well. In other words, on a percentage basis, the highest profit return per dollar of investment is realized on the least expensive vehicles. Not convinced? Ask any BHPH dealer buying a $2000 vehicle. His/her selling price is probably in the range of $6000 on that unit. That is a rate of return of 200%. Try that same return on a $6000 ACV. You’d have to sell it for $18,000 to produce the same return on your investment. You don’t even need a calculator to know that won’t work! Now add the fact that contracts will be shortest on those lower selling prices I am suggesting, and you conclude that a higher percentage of those profit dollars will ultimately be deposited at the bank! And sooner! Go ahead, use permanent ink!

Want to take it a step further? Use those same cost and selling price examples and calculate the resulting cash inflow from payments on that capital. Assume first that the $6000 is used to buy one nicer car that commands a bit higher payment when sold. Now use the same $6000 to buy 3 cars and calculate the inflow on those contracts. If you like, use a higher down payment on the “nice” car. Take your time … I’ll wait … OK, you determined that there is more cash going in the bank and the “profit payments” are arriving sooner and in greater quantity on those lower ACV units. More cars, more down payments, more car payments. Alright, no more math. You can pop a few aspirin and put away the calculator. Together, we have proven that the lower cost units produce the highest cash return on investment as well.

So what, finally, is the optimum ACV number? Easy. It is exactly the absolute lowest cost that will allow you to hit your sales objectives, achieve that all-important account mark, and be profitable! Not one penny higher! Put another way, if you can find and sell thirty $2000 cars you will return more cash on your investment than doing the same thirty cars at a cost of $5000 each. This is because 30 sales means 30 payments with less capital committed at the lower ACV’s. Again, basic mathematics! But can you find and deliver the same number of $2000 cars in your market as you can $5000 cars? That is a question we cannot answer here. What we have answered here is that if you can, you should! This is true at every rung as you climb the ACV ladder and it is true because of limited down payment, limited income, and limited life expectancy of the vehicle.

All poor credit buyers have needs. They also have wants. I urge all BHPH dealers to focus first and foremost on the customers’ needs. This means you have to constantly ask if you are spending more than you should on vehicles because you are catering to your customers’ wants. Or perhaps even your employees’ wants! If you want more BHPH profit in the bank, it is imperative that you stock the least expensive vehicle that will meet your customers’ needs. More of your customers need sedans than minivans and more of them need minivans than SUV’s. If you can buy SUV’s in your market for the same money as sedans, buy them! But if you spend more for the SUV’s without a dollar for dollar increase in down payment, you are putting more capital at risk to serve the wants of buyers with poor credit. Your calculations just revealed that some of that risk is avoidable.

Some will say that choosing the right type of inventory is more subjective than what I have presented here. That is certainly true when catering to customers wants. As a consultant, I simply have a responsibility to urge all of my clients to first tend to their own financial needs, especially their cash flow needs and especially in the case of start-ups . And just like in Algebra 101, there is only one right answer. So strive to serve your customers’ needs while stocking the car that yields the maximum cash on cash return and leave the high risk, reduced return business approach to your BHPH competitors!

2001-2003

What a concept! Make your payment as agreed, your car performs perfectly – miss a payment and you walk to work! The ultimate enforcer! If you haven’t seen the “Starter Interrupt devices” that are available in the sub-prime market these days, it is time for you to come out from under that rock. They’re everywhere and they’re here to stay.

Some of the early versions actually shut a delinquent customer’s car off at a certain time interval, but today’s more sensible products simply disable the starter once an account reaches the pre-programmed point of delinquency. If a customer ignores the tones that warn that time is expiring, they soon discover that their car will not restart. Customers who make payments as agreed receive a code with each payment, good to carry them to the next due date. I am asked about them everywhere I speak. Dealers from coast-to-coast are contemplating incorporating the use of the units in their buy here-pay here operations. I say go for it! Each of the manufacturers offers a surprisingly affordable price. If you are among those still on the fence with PPD’s, consider what they can (and cannot) do. 

Payment protection devices solve lots of problems. They become the added measure of enforcement with those customers who might otherwise make poor choices about their financial obligations. So, for those customers who simply require a firmer form of discipline, a PPD is an excellent way to force them to get their priorities in order. Having the device in place causes the customer to at least come forward to discuss any issue that might threaten their ability to make a timely payment. This is very important. In our training classes we teach managers to notify customers of their responsibilities. There are two: First, to make payments on time and, second, to contact the office on or before their due date if they have a problem making a payment in full or on time. Simple enough, right? Most fulfill these responsibilities just fine. Others are more forgetful. For those, the PPD is ready to do its job. If it gets customers to the office, it is accomplishing something that many BH-PH dealers find most difficult. It has not solved the underlying problem, but it has delivered the customer to you so you can resolve any issues. 

The danger in using these devices is to assume that they will solve all of your collection problems. While a PPD is very valuable, it is known that perfectly good accounts can go south for any number of reasons including, but certainly not limited to, mechanical problems, accidents, company layoffs, family illness, bankruptcy, and divorce. A PPD will not solve these problems. Many such problems cannot be solved at all and will inevitably result in charge-off. However, with proper training, you will find solutions to a number of them. This is the point that is often overlooked in the much-debated value of the devices. The devices are a tool – a very effective collecting tool. They do not save every deal and neither does having years of experience and training. When a BH-PH sale is closed properly and expectations are communicated clearly, the device becomes almost invisible, like a silent enforcer. When the customer does what is expected of them, the PPD is never called into action. And when payment issues arise, a well-trained manager will draw on problem solving skills developed for holding the deal together. 

There is no doubt that PPD’s serve a very important purpose in the business of high risk financing. When used with that purpose in mind and when combined with the right training, the devices will meet your expectations. Use them wisely and bank more of the profit that you book!

2001-2003

In the last issue we covered the collection system and how to get the framework in place for building a successful collection system. We addressed putting the framework in place and building the “team”. Today we take a closer look at a day in the life of a manager (quarterback) and how we, as quarterbacks, might operate on a daily basis in order to execute this system and carry out the overall objective.

As with any team effort, the quarterback needs to be a leader and to lead by example. Quarterbacks have to show up for practice early to watch game film. The information and additional preparation is what typically separates the Pro Bowler from the rest of the pack. As the day starts, we, the quarterbacks, should show up early and get the day started. In order to make decisions as we go forward in the business day, we need to begin our day to with good information. In the case of a collection system, that information would include a delinquency report, a recency report, and an inventory report.

I recommend pulling a delinquency report on a daily basis, even those of you with larger portfolios. There are numerous reasons for viewing delinquency daily; the most important of which, as alluded to previously, is the matter of the disciplinary component associated with collections. We have established that we are collecting from individuals who have shown poor money management in the past. By tracking delinquency on a daily basis, we put ourselves in a position to react swiftly and promptly and to resolve issues before they become bigger problems.

A recency report helps us to better prioritize our delinquency actions. In this case, the recency report essentially allows us to determine, of all delinquent accounts, which ones actually have an arrangement in place or have been paying on their account recently. Obviously, we may elect to reset the priority based on that information.

Even in the case of collection of collection companies, it may be necessary to obtain an inventory report. Disposition of inventory would certainly be part of the manager’s daily responsibilities. Even if not a selling company, there may be repo inventory to dispose of, so the inventory report should be available daily.

Then it is a matter of prioritizing the day’s work. The quarterbacks need to decide which part of the “offense” it is necessary to devote attention to. In this case, we are simply going to establish priorities based on the collection information in the reports we obtained, deciding which accounts demand our immediate attention. Then we will call a staff meeting. Each day should begin with a brief staff meeting with the primary objective of reviewing any issues that the team (staff) may be facing. Also during the staff meeting, tasks are assigned and responsibilities delegated to those members working that day. Those individuals are then dispatched based on the tasks that have been assigned.

The rest of the day is likely spent resolving issues. Quarterbacks become veteran quarterbacks by learning to identify every conceivable defensive formation and choosing the right plays in the right situations. Much like a quarterback occasionally has to improvise and change the play at the line of scrimmage, managers are faced with making difficult decisions in order to be successful. A big part of a collection supervisor’s job will be to resolve issues and solve problems. Good managers deal with the obstacles presented and resolve them in a way that enables them to reasonably predict that the problem will not come back around. It is the manager’s responsibility to do the job of resolving the issue rather than postponing it. Barring unforeseen circumstances, it should be the manager’s objective to resolve delinquency issues in a way that allows the customer to get back on track and remain off the delinquency list.

As time permits between problem solving issues, we can expect that the manager will have some reporting responsibilities. Certainly there will be a responsibility to report to a general manager or a dealer principal, so a big part of the manager’s job would be to collect that information to provide to management/ownership. Of course, this information will be useful to the manager as well in making decisions going forward and in having discussion with ownership about overall company strategy. In order to make sound decisions, the manager must be able to interpret the information and identify key indicators in the operation.

The other component in a given work day is training. I recommend training sessions be scheduled on a weekly basis and be done outside the daily staff meetings. Staff meetings are to be conducted in the mornings with the intention of delegating jobs, resolving issues, and getting the workday in motion. For that reason, I recommend that training be held at a different time, perhaps later in the afternoon and on a particular interval. The sole purpose of that meeting is to provide on-going training for the employees. Any championship team has gone through, and continues to go through, a rigorous training process.  We will have to review “scouting” reports, make decisions going forward, and further develop our skills and techniques. As even the most experienced players require additional training and development because of their desire to be better, so should we.

Clearly, even without selling responsibility, the day in the life of a “quarterback” can be a very full day. Just as the Pro Bowl quarterback learns to avoid looking past an opponent, we must stick to our game plan and execute day after day to reach championship form.

2001-2003

As a consultant in the arena of Buy Here-Pay Here, I receive as many requests for counseling on the subject of pay plans as on perhaps any other matter. Having been an employer and an employee on good pay plans and bad ones, I enjoy discussions on this topic. In my travels I have witnessed too often the consequences that result from a poorly constructed pay plan, and I am happy to direct clients away from these potential pitfalls.

A well-devised pay plan will reward valuable employees and encourage them to stay with the company. Of course, a good compensation plan will also motivate employees to increase production, and the best pay plans will provide some credit for longevity and boost employee morale.

Because our profits are forthcoming in BHPH and because the challenges of the business do not come as much from the selling side of the daily work, it is imperative that a pay plan be balanced. In fact a BHPH pay plan that is weighted too heavily on sales gross is downright dangerous.

I recommend bonus pools that generate amounts based on a combination of sales and collections. I further recommend that such pools include all members of the staff with percentages assigned based on job function. For example, the manager might receive 30% of the bonus pool while others receive 15% or 20% based on level of responsibility. These percentages need not be concealed. It is preferred that the split of the bonus pool be posted for all to see and that the accumulation in the pool be updated and posted routinely if not daily. The salary portion of the employees’ compensation should remain confidential. Teamwork is improved when all members of the staff know that everyone benefits from the accumulation in the bonus pool. Also, it often happens that employees who fail to make an equitable contribution to the team objectives are persuaded by co-workers to increase production. Less productive members of the staff are quickly elevated or they are ultimately eliminated under this plan.

I suggest a bonus pool that accumulates approximately 60% of its proceeds from actual money collected and the remainder from gross profits. This type of distribution works well in new operations and mature ones. In a new operation, the bonus will be driven by gross in the early months and later by collections.

The desired total compensation less the amount of bonus estimated to be paid from the pool determines the portion of an employee’s compensation that comes from salary. The local market and the job description of that position will establish the total compensation. Managers should be receiving at least 30% of their compensation from bonuses earned with production.

If you are among those dealers who can project cash payments for a month or a given term with a degree of accuracy, it may be helpful to create a scale that provides more compensation for collecting a higher percentage of expected payments. Be careful, though. This is where many dealers begin to get in trouble.

Keep the pay plan simple! Elaborate pay plans often compensate people fairly and perhaps even generously, but if a compensation plan is too complicated for each and every staff member to be able to know their precise earnings at any point in time, then the motivation factor is lost. This is very important. Employees must be able to easily obtain the figures necessary to quickly calculate their bonus. Employees are not motivated when a bonus appears on their check without them knowing what occurred to create the bonus or, more importantly, what they did to impact the figure.

There should be no qualifiers or limiting factors on a bonus plan or any other incentives offered. Every dollar of gross should add to the bonus pool and every payment dollar collected should have an impact on the paycheck. You want employees hustling to build on these numbers right up until the last minute of the last day of the month.

Incentives based on delinquency rarely produce the desired results. In fact, they are often counter-productive. A small bonus or reward is fine, but a manager who has to achieve a certain delinquency level in order to reach their desired earning mark will often be frustrated. Delinquency is a fact of life in this business. Reward the manager who leads a team that banks a high percentage of expected payments even if delinquency fluctuates in a reasonable and manageable range. Intelligent managers recognize that unresolved delinquency ultimately results in charge-offs that deplete the gross profit pool so they will have sufficient motivation to act on delinquency. A periodic spiff for delinquency is probably a better solution.

By compensating on the profit and loss reports generated at the dealership, the staff will be motivated to maintain healthy margins on all retail and wholesale sales and maximize income in other areas including loss recovery, interest income, back-end profit etc. 

With approximately 60% of the pool being built from success with the bank deposits, employees soon realize that it is in their best interest to avoid deferring payments and to make contact with delinquent customers to resolve issues promptly. The brightest managers understand that adding quality financed sales contributes to today’s gross profit and tomorrow’s cash flow.

By utilizing a simple pay plan that is driven by the numbers that are essential to your profitability, it is possible to boost company morale, motivate employees to go farther, encourage quality employees to stay, and achieve company objectives all the while. This can be done without having to exhaust so much time following employees around with an iron fist.

2001-2003

Are you among those BHPH dealers that have reached a cruising altitude and stopped growing? If your answer is yes, you are not alone. Thousands of dealers reach a plateau in BHPH after an initial spurt in the early months or years. Some dealers are perfectly content to operate at the same elevation once into positive cash, but solutions exist for those seeking to grow beyond their plateau.

The point at which a BHPH operation reaches this plateau has much to do with the average length of the contracts on financed sales. It is reasonable to expect that the portfolio will begin to lose its growth momentum as the initial loans reach maturity. So the answer to this BHPH dilemma is a simple one, right? It is a simple answer only if your dealership has reached a point of full market saturation at the same time the original loans paid out and if your dealership can expect little or no retention of existing customers. The answer is a little more complex if your dealership is failing to reach its full market potential.

I got the attention of many of our clients recently when I began to ask them some difficult questions regarding their apparent lack of growth. Many acknowledged that they did not feel they had reached a saturation point in their market. The question then became “Why, then, did you stop growing?” Aside from funding, (that’s another article) my analysis revealed that the answers include inadequate staffing, ineffective marketing, inventory mismanagement, and low customer retention. When asked about customer retention, many dealers were unable to produce an exact figure. Most believed that they did a pretty fair job in this area because they felt they treated customers well. I have yet to complete an analysis of customer retention where the dealer did not discover that retention was short of expectations. How long since you measured your own?

Because the focus in BHPH is on cash flow, I suggest identifying only those customers who make another purchase while the original account is active as “retained” customers. Let’s call them “rollover” accounts. A repeat sale to a customer who paid off some time ago is a wonderful thing. It yields gross profit in the same way that the rollover sale does-just at a later date. However, the dealership suffered an interruption in cash flow where this customer is concerned. This is where growth opportunities are most often missed. We also risked losing that customer to a competitor when they left the portfolio believing that they would “be back” at a later date. An aggressive strategy that increases success in the area of rollover sales will build on the number of accounts and increase cash flow. Perhaps you are one of a lucky few that can generate enough new traffic that you can afford to replace customers that are paying off, rather than retain them. Most dealers cannot.

Inefficiency can lead to decreased sales production which will contribute to a flat or declining A/R. Dealers who recognize that they are failing to capture business available in their market should examine their efficiency in these common problem areas: staff, marketing, and inventory. Failing to properly staff the dealership will impact selling efficiency. This problem is magnified in operations where members of the sales staff also have clerical, collections, and/or inventory responsibilities. Perhaps your marketing efforts are uninspired or missing the mark. And last, but not least, the constant battle for inventory. The right inventory combined with the right inventory process can boost business quickly. When the right marketing campaign is executed and the dealership is staffed sufficiently with well-trained personnel, sales increase. Provided that inventory is replenished in a timely manner, the portfolio grows.

Growing beyond your current BHPH plateau is possible. Once the decision is made to climb higher, all areas of your business need to be examined. As corrective measures are taken, you will be able to punch the throttle with confidence and ascend to new heights.

2001-2003

In this issue, let’s get down in the trenches with the buy-here, pay-here manager by taking a hard look at the day-to-day decisions that have an impact on your bottom line. We will explore the important, but often-overlooked choices that determine a buy-here, pay-here dealership’s collection rate.

Among the services that I perform in our office is an intense program that includes weekly data analysis and phone consultation specifically for BHPH managers and dealers. Those calls take me deep into the day-to-day activity and decision-making process at the dealerships. I consistently discover areas where decisions are being made regarding collection practices that are not necessarily dictated by company policy. Many of these seemingly minor items are left to the manager’s judgment, yet they have a dramatic effect on the business. Today, let’s consider some of those choices as they relate to collections.

Most dealers dictate certain collection policies, such as mandatory repossession at a specific stage of delinquency or charge-off at a certain point, but few specify such things as how much cash a customer must produce on a past due payment to be eligible for a payment extension. Such choices are typically left to manager discretion. What is the “official” company position on customers who promise to drop a payment on the 15th but mail it on the 18th? Are all customers who mail payments allowed 7 days from their payday to get the payment in? Is it OK for a “good” customer to make a partial payment as long as he makes a verbal arrangement for the balance? Are customers who change jobs required to come to the office to provide written verification? When buyers and co-buyers part ways, what does the company require of each?

These are the types of decisions that BHPH managers face almost every day. While I am not suggesting that each and every one of these policies be scribed in a company manual, I do recommend that dealers evaluate the manager’s practices in those areas that shape the company’s overall approach to collections. It is very important to maintain consistency and fairness in dealing with delinquent customers. The policies in place, written or not, must ensure that the response to delinquency sends a clear message to those customers as to what is expected of them in all their business dealings with you. Since credit is usually extended to individuals who have shown poor financial responsibility in the past or those who have learned to take advantage of creditors, it is especially important to have well-established policies and procedures for differentiating between a legitimate customer hardship and a well-rehearsed excuse.

Certainly, there are far too many of these considerations to do them all justice in this article, but it is possible to alert you to the key areas to evaluate. Start with procedures for responding to delinquency. Then assess the manner in which defaults on agreements with delinquent customers are handled. Review the way in which mechanical issues are resolved. Evaluate the method of resolving other payment issues as well. In particular, determine the criteria chosen by the manager to decide what circumstances allow verbal agreements versus those requiring a signature or documentation. These are the decisions that drive your bottom line.

I urge dealers to employ a bend-without-breaking policy in BHPH collections to hold loans together and avoid charge-off losses. To accomplish this skillfully and profitably, management must develop policies that clearly define the breaking point. Giving that inch by failing to clarify that fine line can add digits to your charge-off numbers and you may have too many zeros in that column already.

2001-2003

In order for you to get anything useful from this series, we must first agree on the way to measure success in collections. What constitutes successful collecting in this business? 

Cash is king in Buy Here – Pay Here. Success in the business is measured in cash flow. Success in collections is measured in efficiency. What is the portfolio projected to produce? What are the accounts generating in cash payments compared to what is expected? Provided that an adequate level of profit is built into these payments, then efficient cash collections will result in success in BH-PH. How much is enough? What percentage is efficient? Let’s find out!

First of all, to measure your effectiveness in collections, you won’t need a delinquency report. While delinquency and effective collections are related, they are not the same thing. If a customer becomes a few days late, we face a delinquency problem. Provided that quick action is taken to address the matter and the customer makes the late payment, the delinquency problem is solved and cash collections are back on track. If we let a weekly customer get three weeks behind, now we are failing in delinquency and suffering a shortfall in collections. Since we know that this customer usually cannot catch up multiple late payments in a reasonable time period, the company now begins to feel the crunch of the cash shortage. What’s worse, the customer may get nervous and begin hiding after falling a few payments behind to avoid dealing with the payment issue. If the customer ultimately skips, the account will be charged off. We have now failed in delinquency, cash collections, and profitability! Shame on us!

It is those lost payments that threaten our financial future. Therefore, money to the bank as a percentage of money expected is the best measuring stick of your present efficiency level.

Since many of our clients promote payday installments, we typically track these figures weekly. This permits us to identify any deviation from the normal collecting pattern in plenty of time to take corrective action. If your software does not include a report of only those payments contractually due for an upcoming time period, you can arrive at a projected figure yourself. Simply multiply your number of accounts (those active at the beginning of the period you intend to measure) by the average payment on those accounts. Stick to the shortest practical time period. This avoids having payments from new sales create an overinflated amount collected. Tracking weekly virtually eliminates that possibility.

Tabulate the payments collected over the entire period. Deduct premature payoffs, payment errors, and reversals. You want installment payments only. Calculate your collection percentage. Don’t panic if the first one is low, especially those of you who used the average payment method. Calculate at least 4 cycles; 8 to 10 weeks is recommended for those with a portfolio comprised largely of monthly accounts. Collections will vacillate, but over a range of 3 or 4 reporting cycles, collections had better be on track. Our training and consulting clients now stand collectively at 98% over 10 weeks. That is banking what you book!

If your entire range translates to less than 92%, it is now OK to panic. Take a few aspirin and get to work at finding the reasons. You will likely find the cause of your shortfall in one of these areas:

1. Lack of training (Staff lacks understanding of customer mentality and effective approach to collections);
2. Poor organization and execution at the management level
3. Lack of productivity from support staff;
4. Problems in underwriting (Lending to customers we should have foreseen would be difficult to collect);
5. Poor communication at closing (Payment expectations were not clear to customer);
6. Problems with deal structure (Terms are too difficult for the customer to manage); or
7. Issues with inventory (Absence of remedies for failing collateral).

We will be dealing with each of those in the series of articles to follow.

Since we now agree about what constitutes successful collecting, we will begin to lay out the keys to achieving this extraordinary level of success in the next issue.

2001-2003

Suppose you were just awarded a franchise in the NFL, perhaps a new expansion team. You are dreaming of a Super Bowl championship! Exciting stuff! Where do you start? 

What is at the top of your “To Do” list? Provided that you own a stadium, the things on your list are likely to include a coach, players, equipment and certainly some cheerleaders.

In the business of Buy Here – Pay Here, we, too, are seeking that “magic” formula for success. As it turns out, just like in football, there is rarely any magic involved – commitment to a plan and hard work are the keys to winning championships. Since we know in our business that our success is based on our ability to collect our profits, we know we need a system that will produce results. To bring home the trophy, we need a game plan for collections. The first thing, in any game plan, is to get the personnel in order. This would include the head coach (the owner/GM), the quarterback (the BHPH manager), and the rest of the players (BHPH employees).

A Head Coach:

Sometimes it’s you, the dealer, or it may be a GM or other supervisor / policy maker. Our coach is the person who creates and establishes the entire game plan. Once we hit mid-season form, the coach will be doing less training and spending more time observing. When our quarterback gains command of the system, the team should almost run itself at the direction of our “field general.” The coach’s responsibility will be to take periodic corrective actions and make the occasional tough choices.

A Quarterback:

The manager at the lot is going to be the quarterback. Sometimes we employ an all-star who can throw the ball 80 yards off his back foot and some of us use a seasoned leader with average talent who knows and properly executes “the system.” We must be careful not to underestimate the significance of the manager’s role. We depend on this individual to coordinate the daily activities skillfully without losing sight of the larger mission. The better defined our system is, the better the chance that our “average” quarterback can take us to the big game.

Players:

Just like in the football, we have to operate under salary caps (ours just happens to be self-imposed). We probably can’t afford a full roster of superstars so we will find the right mix of players who possess the skills to fill a role in our system. They must demonstrate a level of commitment because we may occasionally ask for 150% effort; 110% is standard, right? We will train and train and train to develop our personnel to their fullest potential – requiring them to always function within the system. We must then reward them for a winning performance, because, unlike the NFL, our employees are ALL free agents!


The Game Plan

Not all systems are alike. And, of course, not all systems perform as well as others. Just as we see on Sunday TV, some NFL teams have systems that are better defined than others. Many have perfectly good systems and the wrong coach or personnel to execute the plan. We can all agree, though, that the teams in uniform on Super Bowl Sunday did not get there without executing their game plan week after week.

Once all the staffing components are in order, it is time to outline and then create the game plan for our collection system. The game plan should include strong leadership, accurate information, policies and procedures, and a strategy for problem solving.


1. Leadership and Supervision

Even the best system is doomed without some degree of accountability. It is essential that the coaches (which in our case may be the owner or dealer principal) understand the system as well as anyone, verify that it is in use, and take action when it is not. Executing this championship system takes hard work. Someone has to make certain that the team is driven to stay the course.

2. Information

Who ever heard of a football team without scouting reports, injury reports, or statistics on passing efficiency? Tough decisions are best made with good information. In BH-PH collecting, you need projections, delinquency and recency reports, cash flow information, etc. (Look for more on this subject in a future issue.)

3. Policies and Procedures

This is our all-important play book. We have to define, in writing, what we want done and how we expect it to be done. We have seen plenty of teams denied a trip to the playoffs because the receiver was thinking post when the quarterback was thinking hook. Our policy manual enables us to get all of our players on the same page.

4. A Disciplinary Element

This is probably specified in the policies and procedures manual but it is worth mentioning separately (even as much as I hate to depart from our pigskin theme). In all types of collections, but especially in BH-PH, it is crucial that the system address the need for swift and consistent action when a customer fails on a commitment. The policy must be clear and the procedure must be executed without fail when the situation arises. After all, our collection system is designed to collect every possible payment that is expected. We must maintain a position of readiness so that we can react to a customer’s problem before it becomes a bigger problem. If we succeed in this aspect of our business, then we are Super Bowl bound!

With the game plan clearly set out, each individual player will understand the overall picture as well as what his/her duties are in that plan. By adhering strictly to the system, we can make our average players into all-stars.

In the next issue I examine a day in the life of our quarterback. We will address the manager’s role in the daily execution of a collection system as priorities are established, tasks are assigned, decisions are made, and issues are resolved. The article also identifies the tools that are available and the skills that your manager must possess or develop to do the job well.

2001-2003

I often say that the quality and performance of a buy-here, pay-here dealership’s portfolio is directly related to the condition of its applications. There is no single thing that occurs at the dealership that is more crucial to the health of the business than the application process. The content and completeness of the applications will impact the collection efficiency and profitability of the dealership in several ways.

Consider what you can expect of applicants in this business. At the risk of appearing cynical or negative, expect that applicants will often be dishonest. The “system” has led them to believe that this is necessary in order to obtain financing. Though you can expect dishonesty from prospective buyers arriving at the dealership, it is possible to require honesty as a condition of financing. This is done with a combination of training and a thorough application process. There are many things that an application should ask of applicants, including:

Who are you?
Your full legal name? Maiden name? What name do you go by?

Where have you lived and worked (for at least the last 3 years)?
Exactly – to the nearest month.

How can you be contacted?
Phone numbers: home, cell, work, or other. Is there another message or contact number where you can be reached?

Who else will have access to the vehicle?
Other drivers? Person living with you who will have keys and share in the use of the vehicle? Anyone sharing responsibility for the payments? If so, the other party needs to sign. When can he/she come in?

Who can confirm the information you have provided?
References – verifiable references that can be reached today – and lots of them. Verification is a condition of financing.

What has been your recent means of transportation?
The last vehicle that you owned? And the one before that?
We are looking for two things here: possible trades and possible past repos. Each can prove critical in your decision.

How do we find the place where you presently live?
A map! Just in case we find it necessary to visit your residence.
I recommend getting a map in every instance but especially rural customers. Having the customer draw the map sends a clear message.

What is your credit story?
The good, the bad, and the ugly. We need it all – with details.

Once the information is recorded neatly and completely in the application, it must be verified. Printed verification is very good, but it should not replace verbal verification. An important part of that verification is obtaining a credit report – not for the purpose of evaluating the customer’s credit, but for use in verifying the customer’s responses. If any of the information should fail to match, there is a problem. The customer has some explaining to do.

Because you are in the business of poor credit financing, expect to encounter customers who are irresponsible. Expect to encounter people who are lousy money managers. Even expect to encounter people who will lie to obtain financing. They need wheels. Expect dishonesty, but do not tolerate it! You can make the customer come clean and begin the relationship based on honesty. Be willing to overlook a lot of previous credit failures, but demand honesty!

In the last issue we discussed a method of measuring success in collections. In this and the issues to follow, we begin to offer suggestions for improving efficiency in collections. 

So, you say you understand your customers and the mentality of the typical Buy Here Pay Here customer. You understand, then, that most BHPH buyers have shown little financial responsibility in the past, mainly due to the fact that they are poor money managers. But do you and your managers understand them well enough to succeed where so many others have failed? Can you succeed, as in collecting over 90% of projected weekly payments and a charge-off rate in the single digits, with these customers?

There are 2 types of customers that make up the “D paper” buyers. The first group is by far the largest: those customers who wish to pay all creditors as agreed but have failed in the past for various reasons – some of which were beyond their control. The second group is comprised of the individuals who seek to take advantage of others in virtually all business and personal dealings. They will lie, cheat, and steal to obtain something for nothing. A BHPH dealership can be highly successful operating with a portfolio of buyers from the first group. Avoid the second! (I’ll tell you how in a future article.) To ensure the dealership of success in collections, one must dig a little deeper. Why has the customer failed in the past? And what can be done to produce better results?

Managers do not need an education in psychology to figure out that BHPH customers will accept more financial responsibility than they can afford. Pull your customers’ credit reports. Note the payment amounts on their past repos, then check their real income at the time. Of course the customer failed! When customers visit a BHPH dealership, they are often in a very difficult spot. Most will sign almost any document presented to get transportation today. Even if they know they cannot afford it, they intend to deal with tomorrow’s reality tomorrow. Today, they are buying a car!

Weekly payment is the biggest reason for people’s failure to pay. Seventy dollars per week, the benchmark payment in BHPH, is too much payment for the average buyer. The typical customer can manage about $300 per month or about $65 per week. Of course there are exceptions, but most accounts above $65 per week are in the danger zone. Structure the deal in a way that the customer can manage it. Then, it becomes a matter of simply requiring them to manage it!

Another factor in a BHPH customer’s inability to pay is the fact that they often CANNOT pay as agreed. It has already been accepted that these customers are poor money managers. Life is full of twists and turns; they will encounter problems. When an unexpected expense occurs, too many poor credit customers cannot afford to handle the surprise expenses and the car payment. Therefore, to collect the note successfully, we must be able to work through those difficulties with the customer.

Once the payment terms are structured in a way that gives the customer a chance to succeed, you are over the first hurdle. Now, how will the sale be closed? When the customers drives away in the car, do they know exactly what is expected of them when they first encounter a problem making a payment in full or on time? When they cannot pay, are they fearful? Will they hide? Or will they call us before we call them? If your customers are hiding, your collection mechanism has a defect. Your staff may be using stern or threatening language that sounds much like that used by previous unsuccessful creditors. Or they may not be communicating anything to the customer, leaving them to assume that your dealership is no different than those other creditors – heartless and inflexible.

We train dealers and their managers to require customers to contact the dealership right away if they have a payment problem. The customer is also required to be – and verified to be – telling the truth about their payment problem. They will not always be able to pay on time, but they must always be truthful in order for us to agree to continue the business relationship. When the customer is forthright, we must bend to accommodate their life changes.

Bleeding heart, you say? Perhaps, but I get calls from dealers with bleeding bank accounts. I often find that no one taught them this fundamental message that we teach and constantly reinforce with our clients. A “payment today or car tomorrow” policy produces too many cars, and subsequent charge-offs, while a “bend without breaking” policy is the secret to collection success with poor credit customers. A graph of delinquency may look like a sketch of the Appalachians, but the stream of cash is flowing!

Most poor credit buyers want to succeed. Help them to do so and you will bank more of the profit that you book!

I am an independent small business consultant specializing in Buy Here – Pay Here. Independence has its advantages. I do not have sponsors to satisfy or vendors that I endorse. Nor have I ever accepted commissions for referrals. Once I am familiar with a clients needs, I only refer them to vendors in the interest of having a satisfied consulting client. So, you can put away your checkbook! This is not a sales pitch – this is free advice compliments of WOSF Magazine! In this article, I do my best to provide you an independent perspective on BHPH software – the heartbeat of every successful operation. Having visited BHPH dealerships in 18 states, I can tell you that not all dealership management systems (DMS) are created equal. Here are some considerations for both managers and their owner/supervisors to consider along with some key questions to ask the salespeople when sizing up their product.

First, it is important to recognize that every BHPH software has its bells and whistles, but I suggest you sort through the sales pitches out there and focus on the nuts and bolts. Think carefully about how you and your personnel will use this tool day-in and day-out in your multi-million dollar business. There are some basic components you should expect from your DMS, especially in Buy Here – Pay Here. Let’s divide those needs into inventory management, sales, collections, security, operational management, and accounting.

Inventory management is very fundamental and most systems handle this area just fine. One area that has proven to be a problem with some is the “unconventional” acquisition of inventory, namely trades and repos. Specifically, does the software add such units to the inventory “internally” or is the user required to stock them in? In the case of a repo, does the vehicle become part of the inventory at the point of repo or at the point of charge-off? If it is the latter, how are you to track and manage those “pending” or curing repos?

Sales is an area where most of us can anticipate the need fairly well. All BHPH software can handle the basic steps: stocking in the unit, pricing, quoting terms, and even selling/financing. Piece of cake! However, the real test is whether or not you can perform these steps as quickly, fluidly, and creatively as you wish. A huge key to success in Buy Here – Pay Here is establishing a payment schedule that is a good fit for the customer. You and your customer benefit from your ability to contractually schedule deferred down payments, multiple payment streams, and even balloon payments where necessary. If you can formulate it, consumer laws allow it, and your customer can better handle it, your software should not prevent you from doing it!

Collections are job one! Software has to help us do that job well! I have seen a variety of collection managing methods that work well. Each method has different needs. However, there are needs they all have in common. The effective management of customers’ status with centrally accessible “electronic” notes is critical. Updated status in note form for all staffers to see! Additionally, the system should clearly display, ideally in a single screen, the status of an account: last payment date and amount, amount past due, amount and date of next payment, and any special approved arrangements. Some products offer the option to enter extensions in way that enables the user to capture those arrangements on reports. With proper training, this can be a nice feature, but it is not essential when good note management is available.

Information shown on payment receipts is worth a look as well. Customers appreciate a receipt that displays their name and account number, the date, payment amount including principal and interest split, and the balance after the payment. Most BHPH software will do that.

Also, surprisingly, not all DMS systems can accommodate principal payments! It will be necessary to do that on occasion, so your software should handle it with ease. If your customer comes into some extra cash that they wish to pay on their account, the result should not have to be that they pay several payments in advance and are therefore not required to pay again for weeks or months. Ask your software salesperson to show you how it is done in their system. There should be no need to modify a contract in this scenario.

For those using or intending to use payment protection devices (PPDs) to encourage payments electronically, “integration” will be of interest. I use the quotes to denote the loose manner in which that word is used on this subject. My definition is an easy one to form into questions for the salesperson: “Will your software reveal the code from my PPD provider once a payment is made? And will it generate that code on receipts? Can I view the PPD code without leaving your software?” The answers to these would indicate to me an actual integration which avoids double entry of payments. The DMS providers can walk prospects through this process during a demonstration. Of course, the PPD providers can supply you with the names of any affiliated BHPH software companies.

Security is so important in Buy Here – Pay Here and it starts with your software! I am not talking about encryption keys or internet firewalls for preservation of privacy or virus protection. I am referring to the security of your hard assets: cash, receivables, and inventory. Good BH-PH software helps you as a dealer/owner to deter theft in a number of ways. It does this with user passwords by, 1) associating users with transactions, and 2) restricting access to certain transactions and functions only to users that you have authorized. Such security restrictions should be the backbone of any DMS in your facility. For example, the authority to reverse or delete a payment, delete a vehicle, amend a contract, or charge-off an account should be strictly regulated in the software by YOU or your most trusted controller. Of course you hire honest people, but good software helps you keep honest people honest and keeps you in the know about irregular activity. 

Regarding passwords, you’ll want to ask specifically if the software prompts for a password as a transaction is posted or only at the point the user logs in. In the trenches, it is just too common for users to walk away from their PC while logged on, making the user ID stamp on reports virtually useless.

Smoothly performing Daily Operations in the dealership is vital to your efficiency and employee morale. Among the things to consider in this area is the DMS’ printing method. Sounds mundane enough, but the method of printing in a car dealership is directly related to the employees’ blood pressure level! Ask any F&I manager printing those multi-form contracts on pin feed printers! The good news is that some BH-PH software companies now offer laser printing. It is definitely a question worth asking. With those offering laser forms, the forms are typically programmed internally according to state requirements and, once generated, they are stored in the system for future viewing or reprinting. The forms are designed and aligned internally in most cases, so there is no form adjusting necessary on the dealer end and the printed forms are very clean. Mind you, some will consider this as one of the bells and whistles, but with laser printers now very affordable, I look for it to become the standard.

For those contemplating a Related Finance Company (RFC), the ability to manage multiple portfolios may come into play. This is an important feature that may be of benefit to larger operations. In some cases, lenders may also take a security interest in a pool of contracts, creating another need for segregating portfolios. The ability to easily manage the transfer or sale of contracts at a discounted rate will also be of value to those selling contracts to a third party. 

On the subject of Networking PC’s in the office, let me do the software companies a favor and explain that networks are really a hardware matter. While some software companies may provide some initial guidance in this area, I can tell you from experience that networks are very difficult to set up and troubleshoot from a distance. What you do need to ask the software salesperson is whether or not their product is Windows based. There may be a few DOS-based products still sold in the market. Find a local network specialist to be sure, but I believe your DMS network capabilities will be limited or nonexistent without a Windows product on a Windows operating system.

Accounting in Buy Here – Pay Here is a bit more involved than conventional retail. I am not going to pretend to understand every aspect of it. I do, however, have a much better understanding of the need for an accounting solution than I once did. This improved understanding comes from managing the consulting department in a BH-PH software company for 3 years. Add my on-site travels and my present ownership and I have definitely honed my BH-PH accounting skills. What did I discover? I learned that I need an accounting solution from my DMS and likely so will you. This is not because of limited knowledge, but rather due to the time involved and/or professional expense associated with preparing the financials. There are good solutions out there that can save lots of time and frustration. So, based on my experience, you have two accounting options from DMS providers: 1) internal accounting built by the provider, or 2) an export feature in the software designed to compile data in a format that can then be imported into various third party accounting products. Each BH-PH software company who provides a third party export will have chosen to do so in a way that is compatible with all or some of the providers such as Peachtree, Intuit/QuickBooks, and Great Plains. In the case of the first option, internally built general ledger accounting, I highly suggest you speak directly to references using the DMS accounting feature or module and even ask them to speak to their controller or CPA. Ask if check writing/printing is managed in the DMS. What about payroll? And ask the DMS salesperson if you can see the user training manual before you buy? 

As a consultant and analyst, you probably guessed that the subject of Reports is very important to me. There are certain reports that are essential in BHPH for loss analysis, tracking collection efficiency, and monitoring transactions known to indicate possible negligence or theft. Ask your software salesperson for sample reports on cash inflow (by type), repo/charge-off loss analysis, transaction logs, deleted vehicles, deleted payments, amended/modified accounts, detailed delinquency, recency (days to last payment), expired insurance, projected payments, and adjusted gross profit (all profit or loss from operations before expenses). This last one is an excellent basis for a manager’s bonus plan. More on that in a future article. 

I wouldn’t consider software for my business that wouldn’t generate a report of payments that are contractually due for an upcoming period. It is that important! Every BHPH owner, manager, and collector needs to have access to a report that shows exactly who is expected to pay and how much during an upcoming period. I could write for pages on how to use this information in managing collections and tracking efficiency, but as David Letterman says, “That’s not why you called.” So, for now, just make sure your software can project payments that are contractually due for a future period and look for more on the subject in a future article. 

For my fellow analytical types, I know you’ll expect the ability to export all reports to Microsoft Excel. Thankfully, this is now fairly standard. The ability to create custom reports and export the results into Excel is a must as well.

There are bound to be lots more reports that may interest you, but the ones that are listed here are essential to good management and theft control.

How Updates to your DMS occur is the final consideration. If your software resides on a local server, will you receive CD’s by mail? Or will you obtain updates via the internet? And will all users across the country receive such updates at the same time? This can be a real problem when you need support. Otherwise, can you be sure that everyone on the DMS’ technical staff is versed on support for your version? Will the company keep up with compliance changes in your state or will that be your responsibility? And if there is a compliance change, will they reprogram forms? At no charge? 

There are web-based DMS solutions in today’s market place as well. This means you essentially log on to a website and therefore utilize the only version of the software available. This also means you are constantly up-to-date and that you can access your software and perform all functions from anywhere on the planet with internet access. There is no “backing up” of data. All data resides with the web-based DMS, but export features allow the user to capture all essential data for peace of mind.

When it is time for you to choose a Buy Here – Pay Here software, you can rest assured that there are some very good products out there. The industry has come a long way technologically in the last decade or so. Plus, a rapidly growing and competitive market place has prompted a lot of progress among DMS providers. You and I as dealers are the beneficiaries! Just keep a focus on those nuts and bolts and you will find the software that is right for your well-oiled BHPH machine!

You damn car dealers (you know who you are) can be a funny bunch! Almost no one becomes a car dealer or top manager in the car business without learning the sales process. And what is one of the key things that we learn when we learn in that training? The importance of building value! We know that value matters. There is a reason that the XLT package, for example, has a higher price! There is a reason one should be willing to pay more for the hi-line model over the base vehicle! We know that. Yet, too many of us – yes, I have direct experience as a member of this funny bunch – opt for the low price when choosing technology and other things for our business. Shame, shame!

In just about every case where I can afford to be, I am a value buyer. I choose long-term benefit and value over low price. I own dress shirts and dress slacks that have made many trips to the dry cleaners and still look like new. Quality! Great value! The cheap ones, as some of us learn the hard way, don’t last. The seams don’t hold up or the buttons become brittle and break. You know what I’m talking about!

But for all we understand about “features and benefits”, we too often cut the sales reps short and jump right to price! Why? Our excuse is that we are too busy to sort it all out. Every rep claims to have the best product and we just don’t have time to research every one and get to the truth. So, we go for cheap and hammer on price: “Get me a better price than the other guy offered me and I’ll consider it.” Of course, all products are not of equal value or include the features that we really need – today and tomorrow. 

In my world of Buy Here Pay Here or automotive self-financing, there are two types of products where I often see this matter of being overly price-conscious: BHPH software and GPS devices. Both are critical components in any BHPH operation. I contend that value matters a great deal in both. In the Data Management System (DMS), too many dealers ask the wrong questions. It is difficult to anticipate all of the ways that the DMS can serve the business – inventory, sales, collections, accounting, etc. Today’s DMS systems are quite capable but they are NOT created equal. The integrations with 3rd parties can be vital – and very valuable! They can translate into efficiencies that are hard to measure but that often have a profound impact on a business and its ability to grow. Making a decision based on price alone is rather short-sighted.

GPS technology is the worst! Price, price, price! Why?! There seems to be a perception that they all do the same thing. I have personally purchased and used at least 4 different brands in BHPH. They are not the same! From quality of construction to antenna type to web management to customer data verification to network (locate) reliability – they run the gamut. Most of these units are installed on very expensive collateral on wheels, yet we quibble over $10-15 per units because, doggonit, we want the best price! Crazy! I once converted a dealership to a new GPS provider. The installer immediately reported satisfaction with the much more robust housing. The complaints about 30-40% of failed locates went away. The ability to share a link (and not the entire system login) was a win! The cell phone app which allowed the installer to scan the GPS unit bar code and subsequently scan the vehicle’s bar code, instantly pairing the two together in the system was a huge hit! Customer service was far better! Quality. Value. Efficiency. Service and support. They matter! When it comes to GPS, choosing right is much more about comparing the total system – device, internal software and antenna, network, web management, payment notification methods, and so on. It is important to let the rep finish the presentation. Doing so could have a positive impact on our business.

Now, I haven’t mentioned any names here. I am a consultant, not a sales rep. The vendors don’t pay me to refer or endorse. I want my clients to always know that when I recommend a product, it is because my experience says it is a superior solution, not because it is company who offers me a better referral reward or because their CEO is my golfing buddy.

Do your business a favor – shift your mind to value when dealing with key suppliers. Think about it the next time you put on a dress shirt. Not all things are created equal. Why would we burden our business and our staff with inferior tools just to save a few dollars? We are all going to “get what we pay for.” Whenever possible, look past today and invest for tomorrow. For BHPH dealers, fatter bank deposits are likely to follow.