Every week there are more and more small finance companies offering to buy receivable from BHPH dealerships. The improving economy has pumped capital back into the market that was starving for funding sources just a few short years ago.
Wholesale vehicle prices remain high and the costs associated with reconditioning continue to increase. The amount of money BHPH customers have available for down payments remains steady, as it has for years. Buy Here Pay Here dealers are being forced to increase their cash in deal on each sale to maintain their sales levels and their customers.
These factors have led many Buy Here Pay Here dealers to consider something they never would have before; selling their BHPH notes. More readily available cash and higher costs have made this an attractive option for some. Let’s look at the 3 major advantages of selling off notes and the 3 major disadvantages so you can determine whether selling some or all of your notes is a step you should consider for your dealership.
3 Major Advantages
1. Quick cash flow
Most of us know of or have seen a dealer that has basically sold themselves out of business. Burning through too much cash too quickly can leave a dealer with no funds left to pay bills or replenish inventory. Even the best dealers will occasionally spend more money than anticipated and need an infusion of cash. Selling BHPH notes is an easy way to do this.
2. Eliminate interest expenses
Many dealers use floor plan lines, credit lines from their banks or loan to fund their operations. Some have had to take on partners to increase the equity in the business. Many of these dealers have decided that selling off notes might be a better alternative to these other funding sources by giving them more control of the process.
3. Focus on sales
By selling off notes, some dealers believe they can operate more efficiently. Selling a note transfers the collection responsibility, in most cases, to the note buyer. That means that the dealer and his employees can concentrate on selling vehicles and let someone else worry about collecting the notes.
3 Major Disadvantages
1. Make less money
It seems the cost of increased cash flow is decreased profit. Note buyers purchase notes at a discount meaning you’ll get less money than if you collected the account yourself. Often, some of the money paid to you on an account is deferred until that account pays off.
2. Lost customer relationship
When you ask dealers who have never sold notes why they have chosen not to do so, this is the reason cited the most, by a wide margin. They believe that, by treating them fairly and financing a car for them, the dealership has established a positive relationship with the customer. Through the first few payments (since many note buyers don’t buy fresh sales), the dealership has nurtured that relationship. For years, BHPH dealers have counted on the relationship they have with their customers to help control delinquency and fuel repeat and referral sales. They believe that selling off notes can destroy that relationship.
3. Damaged reputation
In some ways, this is a continuation of number 2. Not only can selling off notes damage or eliminate the relationship the dealer has with his or her customers, choosing the wrong funding partner can damage the dealership’s reputation. Heavy-handed collection tactics and quick repossessions can reflect on the dealer. Unhappy customers will, typically, not blame the finance company that bought their contract. That finance company is a remote, faceless entity that they didn’t pick. Rather, they will choose to blame the dealer and they will bad-mouth you all over town.
Cash is king in the Buy Here – Pay Here business. Selling notes can be an attractive alternative. Just be aware of its disadvantages, as well, and make sure you do your due-diligence when selecting a finance company to do business with. It is important to look at selling notes as a long-term partnership, not a one-time event.