I'm a new-car dealer, with combined sales of more than $150 million but for the most part it's my service, body works, daily rental, Internet, used cars and special finance operations that are consistently profitable. New cars are another story.
Quite simply, the new-car opportunity has run out of steam for many dealers. If you add up the costs of a new-car department, and divide by the number of new cars sold, most dealerships are in the hole by a few hundred dollars per copy.
Historically we climb out of that hole with after-sale and finance revenue. Sadly, new-car dealers (and I'm no exception) are more desperate than ever to find a profit solution that their manufacturers can't take away.
It seems that the key to many dealers' successes are their used cars generally and special financing specifically. It provides volume with margins. I used to retail 75-125 regular used-car deliveries per month and gross about $1,500 per. Today my special-finance departments sell between 250-400 cars per month, from the same locations, with grosses averaging $3,500.
What's most notable is that this volume is in addition to my regular used car sales, which have not diminished. Special finance creates an average of $900,000 per month without sacrificing the retail used-car business that preceded it.
When done correctly, banks get sufficient interest to overcome higher risk, credit-challenged customers get transportation (which they otherwise could not), and dealers get enough gross profit to support the effort.
What's so difficult?
The credit-challenged customers are tough. The banks are rightfully wary and not inclined to let it slide if paperwork is the slightest bit off. The staff is high maintenance. Turnover is constant. Inventory that was perfect three weeks ago is often burdened.
The toughest part is balancing the morale of highly skilled but creative staff against the discipline of a plan. This is the world of smart, sometimes desperate customers, tricky debt-to-equity deals, and zero-tolerance finance regulations. Dumb folks can't handle it; folks that are clever to the point of tricky, screw it up.
When these deals blow up it's not just repo charges or, heaven forbid, full recourse write-offs. These deals carry a potential for allegations of bank fraud, credit discrimination and unfair trade practices.
Your only defenses are the quality of your internal audits, application verifications and general management of each and every deal. That plus capital, marketing and inventory all need to be in place before the first car is delivered.
Without discipline it collapses in a dust cloud of financial loss and legal liability. Special finance is not a simple matter of talented F&I people on a first name basis with finance guys willing to take chances as a favor for your better business.
Special finance is about these key areas clicking together to unlock results:
- Trained and motivated staff (The most high energy, high maintenance and highly paid folks in the industry.)
- Dependable leads from consistent marketing sources (Direct mail and third party lead aggregation are the backbone.)
- Weekly, yes weekly, acquisition and liquidation of inventory (Without the right fuel or with too much of it, the engine stalls.)
- Sufficient capital for three weeks of sales (Wary banks fund after verification; be prepared to wait.)
- A repo team (Even with best intentions, they'll err 3% of the time.)
- An audit/verification team (An error rate of 3%? With slack here it will become 15%.)
- Exclusive facilities (the pampering of the staff coupled with the fit and finish of the customers, make special finance a rough act to put in the middle of your new-car showroom.)
- Systems and standards (Know your numbers and benchmarks.)
- General management (Organization is vigilance.)
- Dependable banks (In a high-risk business, they are tough or they perish.)
The good news is that if you follow the ten commandments, profits will follow. The rub is that there is no way to do it small.
Peter Brandow is a veteran dealer in Pennsylvania and New Jersey.
