By Tom Herald

My eyes have recently been opened to a whole new world of social media, and the importance it plays in commerce and information today.  Just last week the world’s only real source for news about the uprising in Iran came through the internet portals of YouTube, FaceBook, and Twitter.  Every major news network was tuned in to the web for their updates. 

Whether it’s the latest news, updates, consumer reports or if you want to research the origin of sliced bread, we have an entire world of information available at our fingertips.  We can literally reach and connect to tens of thousands of people in a matter of seconds which has completely changed the way we get and send information.  As a result, the natural laws of advertising have changed as well.

Talk with any advertising agency or marketing firm.  Or, take a close look at the results from your own ads over the past couple of years.  Traditional advertising methods are much less effective today.    Invasive campaigns like noisy TV/radio commercials, direct mail, eMail blasts, and even outbound telemarketing, turn people off.  We don’t want to be interrupted!  When we want information, we want it on our terms and when we’re ready.

People don’t need marketing today!  They don’t even want it.  TiVo, Sirius satellite radio, call screening telephones, and “pop-up” blockers are all highly successful businesses because they help us, as consumers, avoid unsolicited ads.  Initiatives like the Can-SPAM Act of 2003 and “Do Not Call” lists now have much stricter provisions and are as important for car dealers to monitor as the OFAC list of terrorists.  The rules for advertising have forever changed.

To understand why, take some notes from the two Stanford geeks who revolutionized the world without spending a dime on advertising.  Sergy Binn and Larry Page launched Google from their dorm rooms about ten years ago and today, “Googling” is a household term.  These two visionaries own the most valuable domain on the planet because they understand what people want when it comes to information.  They believe that the most effective form of advertising is simply helping people find the most relevant version of what they’re looking for, fast.  That’s why you won’t find any distracting ads when you visit google.com. 

Today, outbound marketing is out.  The impact it has on prospective consumers has been diluted by a more “permission based”  style of “inbound” marketing such as social media sites, blogging, RSS, viral videos, free web based tools, and Search Engine Optimization (SEO). 

To help simplify the exponential evolution and complexities of internet advertising, I have put together a brief overview on Search Engine Optimization that I call SEO 101.  Because no matter how fancy your website is, if people can’t find it or even worse, they don’t respond to it, you’ve just wasted a load of money and lost a lot of ground to your competition.   The good news, it’s not rocket science.  Instead, if you understand the terms, mechanisms, purposes and intent of Google, SEO is relatively simple and inexpensive to do yourself.

SEO 101

• SEO is a process of “optimizing” techniques that help your website rank higher in the organic/natural results for specific search phrases with search engines like Google
• The cornerstone of all searches is Keywords – Words or phrases people use whenever conducting a search.
• Millions of people use Google every day looking for a product, service or information and there are two ways for you to reach them when they search keywords.  
  1. Paid advertising where you pay to be listed in the sponsored section of the search results.  But, think about where you look when you do a search.  For most of us, it’s not necessarily the sponsored section.
     • Keyword phrases are auctioned to the highest bidder and once the money runs out for the month, so does your presence on the list
  2. “Organic” Searches.  The natural rank of your search based on keyword phrases.   The most important difference is that the organic list is free.  Paid placement, otherwise known as pay-per-click, however is not.  
     • Google estimates of how relevant and credible your website is and that process determines your placement on the results page.  This “optimization” of your website’s relevance is what is called SEO. 

Websites are written in HTML (Hypertext Mark-up Language) which is scripting code that describes the structure of text based information by labeling the text as links, headings, paragraphs, lists and content, called “tags” and is completely blind to cool graphics and pictures.   Search engines quickly read, prioritize, and rank the HTML text on the web and display it in “Search Results.”

“Search Volume” is how many people search specific keywords and is the overall size of the list of results.  Google only really knows the exact numbers; it’s a sort of secret sauce for how their engine works.  But, you can get a good idea whenever you search by looking at the results section.  Or, you can go to Google/Adwords and get an even better idea for free.

There are two main factors that determine your place on the list of organic searches:

1. Relevance – The measure of how your website (or more accurately one of your web pages) matches the keywords the user has entered.  Measuring relevance is a relatively sophisticated process, but it boils down to some fundamentals like the title of the page, words on the page and how frequently these words occur on the page.   A good metric to track and review is your conversion ratio – the number of visitors to your site that respond to your site based on specific keyword searches.

Google figures out what your page is “about” by looking at its title and content, and by looking at other sites with similar content.  It then uses this to figure out how relevant you are for that particular search phrase.   Your relevance is based solely on your content and, content is King.  For an example, if you google “BHPH Sales Training” you will see our firm at the top of the list.  But, we would have absolutely no relevance at all for a search on “copper plumbing.”

1. Page Rank - PageRank on the other hand is much more important than Relevance.  It is an independent measure of Google’s perception of the quality/authority/credibility of a single web page and does not depend on any particular search phrase.  For all of us, Google conveniently reports this as a number on a logarithmic scale from 0-10, and is primarily determined by how many other web pages are linking into you.  Google considers an inbound link as a vote of confidence or more like an endorsement.  So web pages with more credibility (i.e. a higher page rank) that link to you have more “value” to your PageRank than those with less credibility.
   • 0-3:  Newer sites with very minimal links
     4-5:  Popular sites with a fair amount of inbound links
     6:  Very popular sites with hundreds of quality links
     7-10:  Usually media brands (CNN.com), global companies or the top blogging sites.

**(If you want to measure the PageRank of your site the Google Tool Bar has a setting that will display the ranking of whatever site you are viewing.)

Search Engine Optimization is like getting tens of thousands of dollars worth of free advertising in the most relevant newspapers or television in your market if done correctly.  To rank high you should do two things:  First, make sure your site has the right relevant content for the types of searches your prospective customers are conducting.  Second, try to get the highest PageRank possible.  To do this, you need to get as many inbound links from as many high PageRank web pages as possible.  Social media sites like FaceBook, LinkedIn, Twitter and AutoDealerPeople can help you tremendously with this.

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By Tom Herald

Have you ever noticed the differences between really good companies that stand out among the competition and those others that just seem out of step?  How about sports teams?  Why did the Bruins dominate the Canadians during the first round of the Stanley Cup?  Why do Roger Penske and Rick Hendrick routinely field championship racing teams?  And, why is Richard Branson so successful?  The one common difference that all successful businesses, sports teams or organizations share is rooted in their ability to outperform their competitors as a team.

I was just visiting an exceptional Chevrolet dealer in the Midwest, the number one volume dealer in Indiana who just completed an outstanding first quarter.  And as soon as you walk onto their lot you immediately recognize the essence and importance of teamwork.   There is absolutely no evidence of a recession or that their manufacturer is on the brink of bankruptcy.  Instead, the entire team, from porters to managers, is focused on serving customers and selling cars.

I also just finished a training event at the Mohegan Sun Casino and Resort, another exceptional organization.  Let me tell you, everything from the valet to check-in to event coordination was performed with meticulous attention to detail and uncommon enthusiasm, the way Las Vegas casinos used to.   Every guest is pampered and every customer is fully accommodated with world class service.  And, the employees are quick to point out that as a team, they “take pride in their service.”  Their reward was a sold out hotel with $800 per night room rates.

Then there are companies like US Airways, who just raised their bag check fee another $5 per bag and, they charge you for peanuts.  You remember, these were the add-on fees some of the airlines implemented to offset the spike in fuel costs last summer.   Well the cost of fuel has come down but these “annoyance fees” have gone up.  And US Air’s generally unfriendly, non-smiling staff are quick to tell you with their “too bad, not my problem” attitude, that they’ve just taken more wage cuts and are more worried about being laid off than about serving customers.

Well I flew these guys a couple of weeks ago after vowing never again and quickly saw the deteriorating fruits of their labor.   I needed to change to an earlier flight so I could catch my daughter’s softball game.  The ticket change fee was $150, even for a frequent flyer.  So I asked, was the earlier flight full?  No.  It was two-thirds empty, as was the one from which I wanted to change.  Still, there was no negotiation.  For that moment they had me, as they squeezed another $150 out of my wallet.  My only other option would have been to pay the $800 one-way fare for the earlier flight.  I was annoyed with every moment of the experience and puzzled by their inability to see the big picture.

In complete contrast I flew on Virgin America for the first time last week.  This company has taken air travel to a whole new level of service, and it was refreshing to see a friendly, professional, enthusiastic and happy team at work.  Everything about my trip with Virgin was a positive experience, from the $250 fare to their smooth ability to make the passengers of a sold out flight feel comfortable.  Again, I needed to change my flight, however their approach made much more sense.  This airline has a “no fee” policy, as long as space is available.  And, they don’t charge for peanuts.  Now which airline do you think posted a first quarter profit while the other had a multi-million dollar loss?

As consumers, we are all critics and fans of retail businesses to varying degrees.  And as business owners/operators, analyzing the hundreds of examples around us on a daily basis is a great way to learn something new about running a company.  It is easy to see who to emulate and who to ignore.  But at the very least, these good and bad examples remind us of how customers react to service, both with their spending and their comments.  Since reading Mark Sanborn’s book The Fred Factor, I am always looking for examples of successful companies that get it right.   In every one of these success stories you will find energetic people who operate as a team. 

The Essence of a TEAM:

Talent – Every successful team is comprised of talented individuals who have the aptitude, drive and character to do their assigned job exceptionally well.  Each position on the team is well defined and interdependent and each team member fully understands how their contributions affect the overall success of the team.

One essential talent that is vital to the success of any team is leadership, and a team needs it all levels.  Leadership is one’s ability to influence and inspire others.  It is the driving force that gets any team through adversity and turns a group of talented people into a team of champions.  And just like every football needs a good quarterback.  Every team needs a talented leader.

Enthusiasm – Enthusiasm requires a positive mental attitude and is highly contagious.  So is a bad or pessimistic attitude.  One negative person can bring down the spirit of an entire team.  But another who has heart and shows courage with an enthusiastic approach to the job can bring everyone around them up, including customers.  Enthusiasm makes people feel good.  It brings excitement to the team and costs nothing to implement.  But the rewards are immeasurable.

Accountability – Every member of a team has responsibilities to the team and, these team mates hold each other mutually accountable for the performance of the entire team.  Accountability is a fundamental discipline for any competitive team because it ensures all the tasks necessary for success are accomplished and raises the standards of excellence.  It puts the elements of success in the hands of each individual on the team.  Without it, there is no synergy and the most talented and enthusiastic groups of individuals will never realize their full potential. 

Mission “Oriented” – All teams need something to win.  They need their success to be defined.  They need a clearly defined mission to accomplish that becomes the goal on which every team member can focus their efforts.  They also need to taste victory, because winning becomes an addictive habit that is essential for champion performers. 

Start small and work on achieving little victories first, as a team.  Then work toward your BHAG (Big Hair Audacious Goal).  The important point is to have a goal for the team to accomplish together; something meaningful on which they can focus their combined efforts.  Once you have the goal, devise the plan, measure your progress, and the rest is about execution.

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By Tom Herald and  Ben Donnarumma

Special Finance is continuing to evolve at a rapid pace.  The demand for financing is growing as consumer credit shifts lower on the spectrum and several national non-prime lenders scramble for cash during the credit crisis.  This combination of events has created a very challenging dilemma for many car dealers – How to finance customers in the “no man’s land” of credit?

This tier I am calling the “no man’s land” is for customers with credit scores below a 550, and there is no shortage.  However, the supply of cash is tight everywhere so dealers have to look for viable alternatives or, continue watching lost deals walk out the door.  Many dealers use companies like Drive Financial, Credit Acceptance Corporation, Westlake Financial, and Western Funding for this tier.  Several others are moving to take matters into their own hands and start their own financing arm, Buy Here Pay Here.   This can be a highly profitable venture if done correctly and the timing could not be more perfect than it is now.  But, if done incorrectly, BHPH can be the most expensive business lesson you could ever receive.

If you are contemplating the notion of taking on the financing of “high risk” customers yourself, I highly recommend you get all the training and advice you can before ever putting one dime out on the street.  And with a lot of hard work and persistence, your success will be grounded in these Ten Fundamentals of BHPH:

1.       Commitment – The number one difference between Special Finance and BHPH is whose money you are using.  And when it’s your own money, the first fundamental is practically a commandment.  You must be fully committed to the business with your heart, soul, mind and resources and keep your focus on the long-term benefits instead of the short-term profits.

2.       Capitalization – BHPH is a long-term business venture that requires capital investment.  You need enough cash to consistently fund your financing for the first two years of operations.  Otherwise, you have to start small and grow your portfolio one deal at a time.  You’ll still get there.  It will just take you longer. The point is you have got to think about how to fund your portfolio whether it’s one deal per month or 100.

3.       Collections – Selling cars BHPH is the easy part.  Collecting the payments after the sale is a whole different story.  This part of the business is not rocket science.  It is however a little four letter word called “work” that is the fundamental element of your entire BHPH business.  Your ability to collect on the loans will make or break your success and is the one fundamental around which the entire program is built.

4.       Compliance – As a BHPH dealer you are a lender, a collector and a keeper of hoards of personal privacy information regarding your customer base.  The compliance requirements you are used to as a dealer only compound with these responsibilities and there is little room for error.

5.       Investigative Selling – Before you loan money to someone you really need to know a few things about them first.  Investigative selling is an important step to setting up each individual deal for success.  During the interview process you can learn volumes about the spending and living habits of your prospective customer that will come in helpful when and if you have to go find your collateral.  Their answers to routine questions will give you a valuable insight in helping to determine whether or not the deal makes sense for your business. 

6.       Inventory – The vehicles you sell must be desirable and affordable for your customer.  They must also be able to last the term of the contracts.  And although your inventory values may not be tied directly to a valuation guide, one of the worst things you can do is stretch your ACVs too far above the market value.  Your portfolio will quickly become unrealistically inflated.

7.       Metrics – Every day you must be able to accurately review the books of the business and hold the team accountable for performance.  BHPH is a daily business so you have to manage it by the day so you need accurate metrics to help you make the most informed decisions possible.

8.       Deal Structure – The structure of the deal determines the elements of risk.  It determines how much cash you are willing to put on the street.  It also determines your margin of profit, above an allocated “discount” that covers your standard losses.  Without enough margin built into each deal of your portfolio, you losses will consume any profits.

9.       Consistency – BHPH requires patience, persistence and consistency.  It is about doing right processes and procedures over and over for the long run and keeping your eye on the long-term goal.

10.   Underwriting – Your underwriting guidelines are your roadmap to building a successful portfolio. You would be doing yourself a favor if you follow the lead of some crafty veterans like Credit Acceptance and Drive Financial and verify every aspect and stipulation of each and every deal before you fund it.  These guidelines are in place to help you manage the risk of your portfolio and there is absolutely no room for shortcuts. 

BHPH can be a very viable and profitable alternative for financing customers in the “no man’s land” of credit.   It affords you the opportunity to take your business in your own hands and decrease your dependency on outside financing sources and at the same time, build a portfolio of wealth.  If you master each of the 10 Fundamentals of BHPH you will be well on your way to enjoying the benefits of one of the best business decisions that can be made in the automotive industry, especially today. 

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Non-Prime Auto Finance Summit

Non-Prime Automotive Finance Summit

April 23rd and 24th, 2009

Mohegan Sun Casino and Resort

email info@heraldassociates.com or call 888.215.1022 Today!

The current US economic conditions have led us to the worst credit crisis in the history of automotive finance. Join the best and brightest minds in the business for a two-day leadership summit at Mohegan Sun Casino and Resort.  Together, we can reshape the future of our industry. 

You cannot afford to miss this one-of-a-kind event where we will be discussing the major problems facing the industry today and, the solutions that separate the strong from the weak.  These professionally led discussions and presentations will include:

• The State of the Industry
• The Future of Non-Prime Auto Finance
• Industry Trends and Benchmark Performance
• Special Finance and BHPH Operations
• Securitization and Capitalization
• Consumer Credit and Collections
• Deal Structure and Underwriting
• Understanding the Non-Prime Customer
• Inventory Management Secrets
• The Vehicle Wholesale Market
• Non-Prime Automotive Sales and Finance
• Understanding The Dealer’s Perspective
• The Top Lenders Today
• The Danger Zone of Compliance
• Training and Retaining the Top Talent
• Dealer/Lender Relations
• 5 Key Strategies for Success

SPECIAL GUEST SPEAKER Jeff Andretti, Indy Car Driver

 Being an Andretti made him a member of racing’s first family.   Being Jeff Andretti made him a relentless competitor who has experienced both triumphs and adversities as a professional race car driver.  His championship heritage provides him with a unique insight into competition and what it is actually like to be in the cockpit of a Champ Car at 235 MPH, racing against the “best of the best” in the world.  Join Jeff as he presents his  family secrets for maintaining The Competitive Edge.

 For The Complete Brochure, Click Here

Cost to Attend:  $495 Per Person

Discount Room Rates For Mohegan Sun

Show Me The Money!

By Tom Herald

Benjamin Herald Associates

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There is plenty of discussion about money, or the “lack” of money as I should say, today throughout the automotive special finance industry.  Dealers, lenders, customers and even industry vendors are all scrambling for hard to find cash.  Well, I’m going to help you find some by focusing on the three revenue centers of a special finance deal.  These three centers for cash are what I call the Trinity of Profit.  They are your only true sources of cash and profit in a special finance deal.

The Trinity of Profit:

• The Lender – No two lenders were created equally and each has what they consider is the best model for making a profit by loaning money and collecting it.  The key to success with any lender is to build a real relationship with your buyers and understand their program like it is your own.  You must structure deals that best fit their parameters and what they want in a borrower.  And since there is no one-stop lending solution in full-spectrum financing, you need 5 – 7 quality lenders that cover the full spectrum of finance in your market.
• The Customer – This is the most overlooked source of cash.  Too many sales teams lose the negotiation battle for cash with their customer because it’s easier to fold than it is to ask the customer face-to-face for something the salesperson believes the buyer does not have.  I’ve sold too many vehicles to people with bad credit thinking I’ve gotten every last dime possible only to see the customer “pimp” out their new ride within the next couple of weeks with new wheels and LCD televisions.  Apple doesn’t negotiate on the price of the iPhone nor does Louis Vuitton on their handbags or sunglasses.  But we see special finance customers all the time wearing designer clothes or using expensive cell phones.  Why?  Because they want to.  And, if you don’t ask for it, you’re surely not going to get it.  The key is to get your customer to really “want” the vehicle you are selling more than anything else that is available.
• The Vehicle – Every vehicle has three different values: the “book” value, the “market” value, and the ACV…how much the dealer actually has in the vehicle.  If the ACV is too high, you lose.  It’s that simple.  You can sell vehicles all day long that make money at the auction but if there’s not enough spread between your actual cost and the preferred valuation guide in your market, you are wasting your time selling the wrong vehicle to a special finance customer.  You need enough spread behind the book to cover the discount fee plus any acquisition fees from the lender.  Otherwise, you’re making up the difference with down payment, or even worse, with lost profit.  And there is a huge difference between the “market” value and “book” value of specific vehicles.  The key is to know which vehicles have the largest spread between these two values and at the same time, is something that customers want to buy.

Now I don’t mean to trivialize the business model but I see too many dealers, managers and salespeople making the special finance sales process much more difficult than it has to be.  Or, they cut corners and take shortcuts with pre-conceived ideas about the industry, the economy, or the customer.   There are processes that have a proven track record for success and if the dealership team follows these procedures every time, without fail, and with no exceptions, they will sell more cars and earn more money.

I realize fully that our industry is changing every day and there are experienced dealerships who are really struggling to put special finance deals together.  But, don’t discard the fundamentals.  The only way to overcome the many obstacles we face is to master the fundamentals that maximize the cash from each of the three sources and look for solutions instead of problems.  Let’s take a look at the lender side of the equation.

HSBC is out.  Wells Fargo and Wachovia have joined forces to evolve the old WFS program and find their new niche.  AmeriCredit is reeling from rising delinquencies in near-prime loans and struggling to find new sources of capital.  And several other lenders have tightened their belts significantly which has squeezed profits and sales from dealers.  So, what do we do?  Heed the words of Albert Einstein and the US Marines: “Insanity is doing the same thing over and over, expecting a different result.”  Don’t be insane!  Improvise, Adapt and Overcome.  Find alternative sources and with every lender you use, adhere to three unwritten laws:

1. Dealers must know the top lenders in their market and fully understand their programs.
2. Dealers must develop strong working relationships or “partnerships” rather, with the buyers at a select few lenders and send them plenty of deals that fit their program.  It’s a matter of “quid pro quo.”
3. Dealers must be proactive with originating and helping to manage profitable loan portfolios with their lending partners.  Auto loan originations are not a one-sided business affair with the lenders having the sole responsibility for portfolio performance.  The crooks and criminals are quickly being weeded out. 

Credit Unions can and will be a powerful lending partner for a dealer that takes the time to develop a strong working relationship with one.  So can the smaller, local banks.  They operate by different guidelines and restrictions than most other lending entities and tend to take an “old school,” common sense approach to loan originations.  If the deal makes sense and is submitted by a dealership they trust, the odds are that it will be bought and quickly funded. 

Several dealers have realized this opportunity and although vehicle sales nationally have continued to slide, the credit union share of the market has increased according to the recent CUDL 2008 market report.  Credit union market share reached 20.8 percent in September 2008 which was a 3 percent increase over September 2007.  The report also shows that there has been a significant increase in loans for used cars.  Take a look at the following graphs that highlight these two key trends.

Credit unions are increasing their share of the auto lending market by being a consistent “local” alternative source for consumer financing and, by partnering with dealerships that understand and pre-empt the changes in the market.  Together, they take a proactive approach to finance that mitigates the risk of non-prime automobile loans by focusing on a sound structure for each and every deal.  It is an old fashioned business model that has stood the test of time and economics and one that makes sense for the customer, the dealer, and the lender.

Deal structure determines profit.  Deal structure dictates loan risk.  Deal structure will make or break the deal.  And, the Cardinal Law of deal structure is affordability.  Can the customer afford the payment?  Can the lender afford the risk?  Can the dealer afford the profit margin?  You can make every deal affordable by focusing on the three profit centers and understand the critical role each plays in determining the profitability and collectability of a loan.

Mr. Tom Herald is a Professional Consultant and National Trainer and with Benjamin Herald Associates.  He has over twenty years of experience in the automobile business and ten years as a dealer principal.  He is a former Air Force Commander with extensive training as a leader and instructor.  He is one of the top experts on Special Finance and can be reached at tom@heraldassociates.com or by phone 859.816.7990  

Copyright 2009 Benjamin Herald Associates, Inc.

The Perils of the Independent Car Dealer

by Ben Donnarumma

“Business at buy-here, pay-here dealerships is picking up as bigger, nationwide subprime lenders tighten credit, or quit the business… As other lenders raise their standards, buy-here, pay-here dealerships are the only option for thousands of high-risk borrowers who need a vehicle…”

These are not headlines or words from an article today.  They are from an old article I dug up in Automotive News by Jim Henry back in November, 2002.   The only difference is that these same words carry a more pertinent meaning in the industry today.  In fact for many independent dealers, they are words of survival.

I’ve seen the numbers and read the reports about the demise of the franchise dealer during the last year; that we are losing as many as 2 franchise dealers per day to the recession while many others struggle to survive.  And I agree, it’s sad to see and painful to watch.  But, what you don’t read much about is what is happening to independent car dealers across the country.  And I will tell you, my heart goes out to many of my fellow “indies” with corner lots in Smalltown, America because that number is as high as 10 per day who are going out of business.

5 Dangers for Independent Dealers

1. Lost Sales – Just like every other dealership in the country as well as many large retailers, sales have been off for several months.  This hits the independent dealer particularly hard because whenever new car sales are off, franchise dealers put more effort into selling used cars and keep more of their old trades.  Lately many large auto groups around me are now a competitor of ours since they have jumped head first into the special finance pond and just muddy up the water for everyone, especially the customers.

But just like I told my staff, patience, persistence, fundamentals and good old fashioned customer service will win out in the long run.  These times remind me of when I first started out in the car business.  In order to stay in business, I had to sell to less desirable, lower income, credit challenged customers, the ones who naturally showed up at the door from word of mouth.  Ironically, it’s these same customers who are paying the bills for us today.  They put me in business and are keeping me in business. 

Lesson:  Know exactly who you are, understand your niche, and remember to take excellent care of the customers who brought you to the dance.

2. Floorplans – Many independent dealers, even the more conservative-minded, started floor planning their inventory when sales and profits were up.  We all wanted to grow.  We were making money and a floor plan created a shortcut to rapid growth.   However, what happens when sales stop?  The bank wants their money and the inventory you bought 90 days ago has depreciated faster than Lehman Brothers stock. 

Many floor plan companies waste no time with independent dealers who are late on their payments today.  I know of several dealers who had their inventory repossessed the moment they became delinquent which just compounds the depreciation problem when their inventory is dumped at auctions, driving the prices down even further.  The good news is there are great deals for those of us who have the cash.

Lesson:  A strong reminder of something that every independent dealer knows – Cash is king!  Growth is great.  But remember; don’t grow too big for your britches.  The seams may come undone at the worst possible time.  Always have an exit plan to de-leverage your debt. 

3. Lost Lenders – If you’ve ever wondered what it’s like to be an outcast or the black sheep, try being an independent car dealer today that specializes in sub-prime sales and finance and you will know first-hand.  We must be the “least desirable” customers in the banking industry because nobody wants to do business with us. 

Now, to give the Devil his due, we are paying for the sins of several less than ethical dealers who got their backs against the wall and left the banks holding the bag, or paper I should say; spending the loan advances on cars they hadn’t yet paid for.  The end result has not been pretty for those who have enjoyed years of strong relationships with the top lenders. 

To solve this problem, undoubtedly the one common issue we all face today with the hugest impact, we have relied more heavily on our own Related Finance Company (RFC) or Buy Here Pay Here (BHPH) as it’s better known.  And for those customers who warrant a more expensive vehicle, we have worked out a recourse agreement with a local credit union to finance them and the combination is working great. 

Lesson:  Again, Cash is King!  1,400 payments per month at $90 each is an excellent reminder of what business I should be in.  Take matters into your own hands and control your own future by relying less on outside vendors and lenders.  But also treat the existing relationships with your closest banks, lenders, and credit unions like they are the most important to your business, because they are.  Lastly, take a good look at BHPH.  It’s not for everybody but it is the core of Special Finance and I can’t imagine not being it, especially today.  It was the best business decision I ever made!

4. Legal Compliance – It’s not enough that we have multiple battles to fight on several fronts but this one called legal compliance can go unnoticed for years, slowly building up until one day, Bam!  It hits you like a Kamikaze sneak attack that can instantly put you out of business.  It’s an issue that simply cannot be overlooked, ignored, or put off until you have more time to deal with it.

The new Red Flags Rule, Gramm Leach Bliley, Truth in Lending, OFAC, Fair Lending Act, and all the State and DMV requirements make doing business that was once a walk in the park, like walking through a mine field today.  Pay attention and be careful.  The consequences are just too costly.

Lesson:  Don’t overlook or underestimate the significance of becoming and staying legally compliant.   Know the rules, stay up on the knowledge, and mandate that it becomes instilled in the culture of your organization. 

5. Managing the Budget – Remember a car dealership is a business, and for many of us, it’s our way of life.  If your budget gets out of whack there is no time to hesitate.  There is no time for blame, nor time for sulking about the economy.   You can lose $50K or $75k or even more, in a blink of the eye and before you know it, there’s no money in the checking account.

And, if this happens, don’t look for Uncle Sam, your banker, or anyone else to bail you out.  You’re not General Motors!  It’s not going to happen.  Instead, you have to be proactive.  Know your financials and manage them daily.

It’s too easy to get comfortable with all the toys, gadgets, latest software and services, and even the people who become like family but cost you money.  If it’s not making you money, saving you money or saving you time, you probably don’t need it.  Get rid of it and do so in a hurry.  Because time is money and every day you hesitate could be costing you a fortune.

Lesson:  There is a huge difference between needs and wants.  Keep what you truly need to operate your business and get rid of the rest.  Check and manage the budget daily.  And when you see problems, act immediately.  Don’t hesitate.  Because an unprofitable dealership is an unsafe place to work.

Click to Download Article: The Perils of the Independent Car Dealer

Putting Life Into Perspective

By:  Courtney Cox Cole, Hare Chevrolet, Noblesville In

As we go through life, we all have our ups and downs. Every so often something happens and it makes us realize what really matters. Fortunately, we live in a Community that sticks together and takes care of each other. That is why I am writing this message.

The Father (Mike Zike) of a 16 year old child (Derek Zike) works in our Body Shop. He is a fantastic employee. On Friday, January 16th Derek was involved in a horrific hockey accident. He was playing for the AAA Chicago Fury. During the game Derek attempted to make a turn and lost an edge of his skate, fell and slid head first into the boards at a high rate of speed. It all happened so quickly he was unable to brace himself for impact. Derek was not hit by anyone; it was quite simply the result of a lost edge while trying to turn. This accident happened in Ann Arbor, MI during a tournament. He was rushed to the University Hospital. He still has no feeling from the waist down. He sustained a burst fracture of the 5th cervical vertebrae.

On the 26th of January, Derek’s lung collapsed and he is now receiving almost 100% of his breathing via a ventilator. He was admitted for another surgery yesterday. The surgery was to complete the insertion of bone in the injured area and complete the steps associated with a multi-level spinal fusion. The surgery went well and Derek is recovering. Derek’s breathing issue seems to be headed in the right direction. Although he developed pneumonia and is receiving assisted breathing following his surgery last night, it appears as though he will soon be removed from assisted breathing once it is determined he may satisfactorily breathe on his own.

Derek will remain in the hospital for quite some time. Derek’s parents,Mike and Robin, will be rotating in Ann Arbor while Derek remains in the hospital. When Derek is released from the hospital he will require
extensive physical and rehabilitative therapy. The family’s expenses will continue to grow and our help is needed. As people, we have an unbelievable capacity to come together and to help a family in need.

HERE ARE A FEW WAYS THAT WE CAN HELP:

Mail a check payable to:
Derek Zike Special Needs Trust
c/o of Founders Bank
14497 John Humphrey Drive
Orland Park, IL 60462

Donate Online at: www.derekzike.com

Any amount will be very helpful. It would also be greatly appreciated if you could forward this message to all of your friends and help this family in this very difficult time. You may also join the facebook group
Pray for Derek Zike or go to http://www.chicagofury.com to receive regular updates on Derek.

THANKS FOR ALL YOUR HELP! THIS IS WHAT LIFE IS ALL ABOUT.

Several years ago when I first started out as a dealer one of my biggest frustrations with Special Finance was paying a salesperson 25% of the gross profit for basically, just going on a test drive.  It didn’t take much talent or effort to sell a vehicle to these credit-challenged consumers who otherwise were relegated to driving their “hoopties” or taking public transportation.  From my perspective, it was like selling water to man dying of thirst.  The real challenge of the sell was getting a lender to pony up some money for a loan that in all likelihood may not be repaid.

Well, it’s not much different today with one major exception – competition.   As recently as five years ago any dealer who focused on the Special Finance customer could easily run a successful business as long as they had a few good sub-prime lenders and could find affordable cars to sell that would outrun the term of the loans.  For many of us, this business was easy and simple.  It was like shooting fish in a barrel. 

We had the business.  We had the “know how.”  And we had plenty of captive customers, desperate for a reliable automobile but with very few places to buy one.  To be successful, we didn’t even have to be nice to the customer.  We only had to be nicer than the local franchise dealer who aggressively shooed them off their lots like they had a contagious disease.  And if you had any business sense at all, it was not too difficult to corner the market for these “unwanted” customers because the demand for services was high while the supply of effective “know how”  and desire to sell to them was low.

But the industry changed and the evolution of special finance really started to gain momentum.  By 2003, several dealerships across the country were offering some sort of “guaranteed financing” to customers with bad credit.  Numerous bright, opportunistic dealers, both franchise and independents alike, started delving into the special finance segment for its huge profits.  The secret was out about these unwanted customers and many dealers were starting to prefer them over the price-conscious negotiators with good credit, fresh on the lot and armed with a wealth of internet information.

The oversimplified secret of success in special finance was a much more desirable business model, or at least something worth trying.  Many dealers signed up every non-prime lender possible, appointed a talented “paper hanger” as a special finance manager, and employed a couple of inexperienced salespeople as assistants.  They then started buying leads from a third-party provider and instantly were in the “Spy Fi” business, much to the chagrin of the more experienced dealers.

As more and more car dealers entered this segment of the market, the landscape of automotive financing quickly began to change.  Competition and capitalism were major driving forces and the sub-prime customer suddenly had more choices for buying a vehicle, both good and bad, than ever before.   As long as they had a decent paying job with some stability at their residence, they were driving, regardless of down payment.  Special finance sales quickly became a major profit center for many dealers and the “value” proposition for the customer began to focus more on “how much car they could get with little or no money down,” than on prudent deals that actually fit their budget.

The captive finance companies even jumped into the ring in full force.  And soon it became common to see customers with credit scores below a 520 drive away in a new car…with little or no money down and no redeeming credit qualities.  It seemed nobody had a concern for common sense and logic with loan originations.  The focus instead was on profit without regard for equity or concerns for loan-to-value.  

Thirty-six month terms on sub-prime loans quickly grew to forty-eight months, then to sixty, then to seventy-two and even eight-four month terms for non-prime auto loans.  Deal by deal as the market continued to grow, we struggled to maintain profit margins while at the same time cover up negative equity that in many cases exceeded the actual value of the collateral being traded.  We were inadvertently creating our own version of an economic “bubble” by putting too many people into vehicles they simply could not afford.

Can you imagine where we would be today if the automobile was an appreciating asset like homes used to be?  We would have a bigger mess than our cousins in the mortgage industry once the laws of business and economics finally collided.  It would be another fiscal train wreck, and perhaps much worse than it already is. 

So, where do we go from here?  The special finance industry will continue to evolve naturally under the brutal forces of capitalism while dealers, lenders and the manufacturers continue to react to their economic environment.  It’s back to the basics where the laws of supply and demand and the fundamentals of finance will dictate the future.  And for us, it all starts and ends with the customer – The special finance customer.

This buyer still needs reliable transportation and the associated financing that goes along with buying a big-ticket item.  And, just like the rest of us, they also want the best value they can afford to buy.  But the real art to putting together a special finance deal focuses less on what these high-risk customers want and more toward finding a lender that will finance them and still advance enough money so that a dealer can make a profit.   Every deal must be aggressively negotiated for sound, profitable and collectable structure because the list of lenders lining up to loan money at unrealistic terms is dwindling as the market settles back down to reality. 

The special finance segment now comprises over 60% of the market and continues to grow while at the same time, we have collectively lost 40% of our ability to finance non-prime customers.  The demand for vehicles is still strong and growing, at least in this segment.  But the supply of financing has stalled.  More and more people are now suddenly unqualified to buy late-model and new vehicles at least at terms that cover up huge equity deficits and still provide a dealer a modest profit margin. 

As a result, the special finance customer is again becoming an unwanted entity in the marketplace and only those dealers who have the “know how,” ability (lending strength), and desire will be able to offer viable choices that actually satisfy their needs.   Special finance dealers will soon have a more captive customer once again.   However, this time around, these astute dealers have learned to master the fundamentals of finance and the art of customer service.  They fully understand what every good buy-here-pay-here dealer has known for years:   You can build a very lucrative business around the Special Finance customer with a good lending source and a lot of common sense

How tough new laws on resolving personal debts are burning lenders—not just cash-strapped Americans

by Jessica Silver-Greenberg of Business Week

The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn’t take on risky mortgages in the first place. And that’s bad news for lenders, which suffer financially every time they have to take a troubled property on their books.

Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%. “[The rules] are directly responsible for the rising foreclosure rate,” notes another report by investment bank Credit Suisse (CSR). Counters Philip Corwin, counsel at the trade group American Bankers Assn.: “These studies don’t stand up to scrutiny.”

Banks and other lenders probably never imagined such an outcome when they pushed for changes to bankruptcy rules. The courts were clogged, the industry argued, with consumers looking for any easy out from bills they could pay. As a deterrent, companies wanted to raise the bankruptcy bar.

They got what they wanted. Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn’t stave off foreclosure

ONLY TEMPORARY RESPITE

As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that’s often only a temporary salve, since other debts aren’t eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew. Says Chicago bankruptcy lawyer David P. Leibowitz: “In some cases, bankruptcy has become so onerous that it’s not worth it to save the house.”

The pain of foreclosures, of course, isn’t limited to the people losing their homes. A single foreclosure cuts the value of nearby homes by an average of $1,508 nationwide, according to a report by the Joint Economic Committee of Congress (JECC). Lenders, too, are feeling the bite. Financial firms, the JECC found, take a $50,000 hit on each property they inherit via foreclosure. That weighs on earnings and limits their ability to make fresh loans.

Cases such as Yvonne Reina’s will mean more pain for everyone on the housing food chain. Reina hoped to keep her duplex in suburban Chicago by filing for bankruptcy. The 54-year-old claims processor fell behind on her mortgage payments after a knee injury left her unable to work. She consulted a lawyer about declaring Chapter 13. But he advised against it, saying the payment plan would be too burdensome, given her limited income. In March the bank foreclosed, and Reina moved into an apartment. Says Reina: “I just couldn’t make it work anymore.”

Silver-Greenberg is a reporter for BusinessWeek.com.

The Full Spectrum Solution to Lost Sales

There has been tremendous change throughout the auto industry over the last year to say the least, and from all indications, it doesn’t look like the dust is going to settle any time soon.   The best way for me to describe automotive financing today and in particular, Special Financing, is to compare it to 1980 when the choices for consumers with credit problems were much more limited than they were the first half of 2008.  There were local banks, a few specialized lenders, and buy here pay here.  That was pretty much all we had.  Now in reality it may not be that bad but it sure feels like it.  Since the summer of 2008, we have lost more than 40% of our ability to finance automotive consumers.

Dealerships throughout the country are struggling to finance customers with a credit score below 550 today, the fastest growing segment of the industry.  It is very difficult to find deals in this “no man’s land” of lending and when the dealer finally gets one, the customer has no money for a down payment.  This is a common theme all across the country – dealers have plenty of customers with poor credit and no money down.  And the bottom line result is no deal.  More and more customers are leaving dealerships via public transportation than in newly purchased vehicles.

The solution to this magnanimous problem for dealers lies in one of the Key Fundamentals of Special Finance – Full Spectrum Finance.   Full spectrum financing is an absolute necessity for car dealers today.  It affords them the ability to offer vehicle purchasing options to every customer who visits the store, regardless of their credit and with less emphasis on down payment.  It removes an important limiting factor from the typical sales process and if done correctly, will help dealerships build customers for life by making financing as simple, seamless, and as profitable as possible.

Full spectrum financing covers the full spectrum of consumer credit scenarios.  Over the past six months we’ve had to add a new tier to our Credit Pyramid that depicts this spectrum– The No Man’s land between a 550 and a 520 FICO score.  We did so in order to better explain the market today (Refer to Figure 1).   Most dealers have no problems financing customers with a 550 score or better.   It’s this third tier however that presents the most problems.  It is the one that’s growing the fastest due to the recent credit crisis, but it’s also the one that lenders are shying away from.  And, at the same time, it is one tier where customers aren’t quite ready to accept a buy here pay here loan.   

The prime tier is easy.  It’s not hard to find good lenders to finance prime customers.  In the near prime tier you will still find competitive lenders who are large and progressive and may even buy down into the upper echelon of the third tier.  Small regional banks and local credit unions are great options to have in your repertoire especially if you build strong, profitable relationships with them.  You will find them to be strong business allies that are in it for the long haul.

Like I said earlier the third tier is a whole different story lately.  This is a segment of the business where we really have to rethink our game plan and may even have to take an entirely different approach to sales and finance.   HSBC is out.  Triad is only servicing loans.  Wells Fargo recently bought Wachovia and no longer offers indirect lending.  Americredit has struggled for quite awhile securing capital and managing growth.   And as a result, Capital One is tightening their belt since they have unintentionally doubled their market share.  All in all, we have lost over 40% of our financing ability in the industry and the majority of that loss occurred in this third tier where the recent credit crisis has forced a large percentage of the population.

In order to be effectively finance customers in this new third tier of the credit pyramid, we have to take a closer look at the Four P’s of business:

·         People – A dealer’s staff must be proficient at finance with a thorough working knowledge of every lender’s program that operates in this tier.  The staff must be adequately trained in a sales approach that effectively develops the customer’s real need early and focuses the sale away from specific vehicles.   Every member of the team must be held accountable for generating results.  There is neither time nor room for a freelance sales approach, particularly with this tier of customer.

·         Process – A strict adherence to a proven “Road to the Sale” can save even the weakest of teams.  The sales and finance process are intertwined in special finance, particularly in this third tier, and your procedures should be second nature to every member of the team. 

·         Product – Your inventory will make or break your deals.  The days of 84 month terms and 150% LTV loans are gone.  That’s why I strongly urge you to buy and maintain a 45 day supply of inventory for this tier with an ACV between $5,000 to $7,500 and at least a $1,000 spread behind book, mileage between 50K and 75K, and an age of no more than five model years old.  Anyone saying you can’t find these vehicles is simply wrong.  Call me and I will put you into contact with dealers in several States who can help you.  Remember to purchase your inventory by considering your financing options on the lot.  I recommend that you factor a $1,200 down payment, 48 – 60 month terms, your State usury rate for interest, and a lean,” safety only” reconditioning policy.  This will help ensure that you maintain an adequate supply of inventory for the credit tier of highest demand.

·         Promotion – You don’t have to spend a lot of money advertising for customers in this tier.  If you’re like most other dealerships, you already have plenty of customers who fall into this category of financing and my primary focus would be to concentrate on these existing customers first.  You can waste a lot of time and money trying to force a market that is not ready to buy.  My advice is to purchase and manage good sales leads until you can develop the ability to generate them on your own and, demand in the first and second tiers returns. 

The forth tier, custom finance, is where most dealers fall short.  Even dealers who have been involved in special finance for several years tend to ignore this category of financing either out of fear, or from a lack of understanding.  Whatever the reasons, they just don’t seem to have the stomach for the buy here pay here class of customer.  To me any dealer who is not actively engaged with their own Related Finance Company (RFC) or BHPH operation is missing an incredible opportunity for sales and profits that can be an integral part of their business.

There are several very strong lending sources who are experts at this level of financing and collections if you choose not to tote the note yourself.  Credit Acceptance Corporation, Westlake Financial, Western Funding Inc (WFI), Drive Financial, and sub-prime auto leasing companies like Auto Trakk are all great business partners that are thriving right now and can help you sell more customers by expanding your spectrum of financing.  They will give you the ability to finance buyers in both the third and forth tiers of the credit spectrum.

Dealing with change is not optional.  We have to be tactically minded and proactive in our thinking; we must meet the needs of the consumer by understanding the market and offering solutions that work.  Full Spectrum financing allows a dealership the ability to sell more cars to more people, and evolve with the demands of the market. 

Download The Full Spectrum Solution to Lost Sales