Auto Dealer Monthly Magazine is the daily operations publication serving the retail automotive industry. This automotive publication serves dealer principals, officers and general managers with the latest best practices.
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industry expert / bhph 5 Things Complicating Your BHPH Results Mark Dubois is the director of buy here pay here performance groups and a BHPH moderator at Performance Incorporated, a division of ADP Dealer Services. He has more than 30 years of experience in the automotive industry and can be reached at 941-729-5765. MDubois@AutoDealerMonthly.com R eflecting back on 2012, I hope you can answer this important question: Was my BHPH business profitable? If the answer to that question is not a resounding yes, then I would recommend you implement some specific steps that will change that answer in 2013. The next question you should answer is how profitable was your BHPH business? The most successful BHPH operators typically generate gross profit as a portion of revenue in the 30 to 40 percent range. Examining how profitable your business is opens the door to exploring how much more profitable your business could be if you reduced or eliminated obstacles that negatively impact profitability. The single largest negative impact on profitability in a BHPH business comes from charge-offs. While charge-offs are a fact of life in a BHPH business, the degree to which you can reduce charge-offs will result in a positive impact on the profitability of your business. Here are five items you should examine to determine if any of them are complicating 10 your business and, ultimately, resulting in charge-offs. 1. Not having loan scoring criteria for evaluating finance applications: What factors determine if a finance application is approved or declined at your business? Are credit decisions based on facts or gut feelings? Do you have a format to identify the minimum criteria for approving or declining a finance application? Do you know the demographics and qualifications that your bestperforming customers have in common? Can you clearly identify exceptions to your underwriting criteria before making a finance decision? In the absence of some form of loan scoring criteria, credit decisions are often influenced by pressure to increase sales volume or meet monthly sales targets. Knowing the profile of your best-performing customers and being able to quantify a loan decision will go a long way to adding better performing loans to your portfolio and ultimately reducing charge-offs. 2. Skipping the verification step in the underwriting process: On a busy day, your business might have several finance applications on the go at the same time, and the store is buzzing with energy and anticipation of a big day. Prospective customers are anxious to get a decision on their finance application and take delivery of their vehicle. However, verifying the applicant's information is one of the easiest steps to skip in the underwriting process. This is one of the "self-inflicted" items I mentioned earlier that complicate your BHPH business. Not taking the time to verify the applicant's employment history, residence history, income, credit history and personal references is a formula for disaster in a BHPH business. Yet many BHPH businesses do just that–finance applications are approved based on gut feeling and with little or no verification that the information provided is complete, accurate and current. Verifying all information about your prospective customers before the finance applications are approved is a good way to increase the odds of applications resulting in successful loans rather than charge-offs. 3. Permitting a large down payment to influence your finance decision: If you're in the BHPH business, you've probably already made this mistake and seen the results. There is evidence to support the fact that a large down payment does not guarantee successful payment of the finance agreement. However, a large down payment becomes a big temptation to approve the finance application and skip the discipline associated with good underwriting. With tax refund season approaching, it will be important to remember this fact and apply the formal underwriting steps outlined in items 1 and 2 above. The general rule is that a large down payment should be used to improve the deal structure, not to approve the finance application. 4. Not having formal documentation for payment arrangements: Successful BHPH dealers will work with customers who can't make a payment in full or on time, provided the customer can provide verification to support their circumstances. Delinquency is a fact of life in a BHPH business. However, how you manage delinquency may be one of those items that complicate your BHPH business and impact profitability. To ensure that you mitigate collection problems, step one is having a well-trained collection staff. Step two is having formal policies and procedures in place to guide and direct your collection activity. Many times the collection department will extend a payment arrangement to a customer but will not document the terms and amounts of the repayment plan. Simply telling a customer they can