As new-vehicle sales continue to be affected by the economy, and with the decreasing average credit scores of vehicle purchasing customers, many franchise dealers are considering adding a buy-here pay-here operation as another profit center for their business. This addition of Buy Here, Pay Here is not as easy as opening another used car lot and can be expensive and cash flow negative for some time. The long term profit potential, however is more consistent and predictable than the new vehicle department. This is Part 1 of a series of articles to help new car dealers understand the BHPH business.
I started my BHPH business when I had a new car store and ran them both for over 26 years.
For some time, buy-here, pay-here has had the image of an operation not particularly good for new car franchisees. To begin with, due to the difference in demographic of the customer, new car franchise staff and owners have been concerned that they would have too many BHPH customers tieing them up in their new car showrooms. Also, there may have been a concern that once a new car store became known for selling buy here pay here, the average Fico score of its’ customers may drop, and the retail banks approval rates may go down for their “good” credit customers. Some of these may be partially true, but the benefits are so strong, and there are ways to do BHPH without having the negatives.
You will have to make a commitment to this mentally, financially and with your time. I like to think of it as another franchise with very good long term possibilities, but it will need some attention.
How to start…
1) You need to get an education in Buy Here Pay Here.
Start by going to the NABD web site (National Association of BHPH Dealers). There are a list of resources, seminars and free stuff to get you started. Both CarBiz and Leedom Associates and many others offer training also.
Then join a twenty group. These are offered specifically for BHPH by NCM, CarBiz and Leedom Associates. You will learn more here than you can use, but it also is intensive and if you are not open to friendly criticism, stressful. There is no better way to learn BHPH and how to run your business effectively.
2) You have to figure out how much you want to invest, before you decide how large and how fast you want to grow. The negative cash flow numbers can be HUGE ( they can be $100’s of thousands a year if you are not careful). Slow solid growth is the way to go.
3) For new franchise dealers, in my opinion, you need a separate lot, with a new company name to make this work. With the lot, you also need dedicated BHPH personnel. Your new car people will probably not be able to make the adjustment without some physical separation.
4) Be sure to set your underwriting guidelines and deal structure (how much your cars cost, the profit and how much money you want at risk per deal) before the first car is delivered. Don’t understand this stuff…see 1) above.
5) You need experienced collectors. Your loan portfolio will not pay out if you put good cars and good loans on the books, but have poor collection. Buy Here Pay Here is more of a collection business than a sales business for the truly successful dealers.
6) Many of the trade ins you are currently sending to auction will be your BHPH inventory. You will also need a special buyer to buy your BHPH inventory. It takes a different look and feel to buy these cars. They are typically higher mileage and older, but need to be solid, reliable cars. You may be able to write more new car deals also, as now the older trades are worth a more to you.
It’s a little work, but like I said, treat it as a another franchise. How much would you invest to have a franchise that can sell into a credit challenged market like we have today?
Check out the rest of my series of articles here at Ezines for New Car Dealers and the BHPH franchise!