Differing BHPH Strategies in the Current Economic Environment
Buy here, pay here dealers are approaching the current economic environment with differing strategies. If an operator does not have cash reserves on hand (very unlikely in the BHPH business) then he must either loan his operation more money or make an additional capital contribution in order to make an immediate debt reduction.
The current economic environment has severely curtailed the supply of capital to all industries. How are lenders & operators reacting to the current funding environment? If an immediate debt reduction is not required, but the lender wants a reduction in the future, operators are reacting in different ways:
1. Cutting overhead and expenses to increase cash flow which can then be used to repay future debt.
2. Reducing sales volumes by tightening underwriting criteria. This reduces the amount of money being “put on the street” but likely will also reduce overall portfolio size.
3. Changing the business model by reducing vehicle acquisition cost or by increasing down payments or repayments. However, selling a cheaper car with the same origination term will likely increase losses in the future.
4. Trying to refinance or obtain additional subordinated debt.
5. Considering a “sell-off” of a portion of their existing portfolio with the proceeds to be used to reduce debt.
6. Other options include lot closures, consolidation, sale or merger.
Although none of the above appear desirable, the goal to reduce the amount of leverage in the industry is a positive one. As difficult economic times continue, better-quality credit customers are entering the market. The competition for these customers has been greatly reduced by a reduction in the subprime lending market. Operators who can “free up” additional cash flow will be able to capitalize on these opportunities. Further, as better-quality credit customers enter the market it is hoped that operators will improve their deal economics by increasing down payments and repayments. However, many operators will have to learn how to attract and close these “better customers” as they expect different treatment.The decisions operators face today will have signifi cant implications for years to come. Therefore, future strategies should be carefully evaluated in conjunction with networking and dealer education. Costly trial-and-error mistakes must be avoided as it appears there is not enough money to spread around!
Kenneth Shilson, CPA, is founder of the National Alliance of Buy Here, Pay Here Dealers (NABD) with 3rd annual UCC confered in Houston, TX Nov 8-10. Call 713-290-8171 to register or visit www.bhphinfo.com.
