Posted on Nov 11, 2016

Subprime lending is alive and well on Wall Street, and not just in real estate. Low interest rates and less consumer demand are prompting brick-and-mortar and online lenders to tap into subprime auto finance more than ever before. Rather than focus on this increased competition for indirect loans, auto industry experts recommend that BHPH dealers focus on operational efficiency and alternative sources of revenue. Dealers who improve cash flow through after-care products and customer retention can ride out the subprime boom. As a bonus, a more efficient dealership will be less reliant on working capital financing in the future.

In our last article about BHPH structuring and scalability, we wrote about ways to maintain compliance on bank financing, filing an accurate and clean tax return and operating at a profit. For start-ups and independent BHPH dealers, a clean structure will create more cash flow and level the field with subprime lenders at banks, credit unions and online. As we’ve said before, your best asset is not your inventory; it’s your credit portfolio. Let’s take a closer look at your competitors in auto financing. By learning about your dealership’s competitive advantages, you can add more streams of revenue, get more customers to finance on site and get more customer referrals.

Auto Financing Trends

According to a report by the Center for Responsible Lending, car pricing information available online helps consumers more effectively negotiate the sales price of a car. Because this has reduced the profit margin dealers receive on the sale of cars, all dealers are relying heavily on profits generated after the sale of the car — extended warranties, credit insurance, guaranteed asset protection (GAP) insurance, vehicle service contracts and so on.

In the case of auto financing, however, information is not readily available. Consumers can’t really shop around because financing is based on things like the type of car, the sales price and possible trade-in value as well as the consumer’s credit worthiness. An application for financing is submitted after most decisions are made — and that application could happen online or with the customer’s local bank or credit union.

Due to most consumers’ large appetite for used vehicles and lower tolerance for debt, BHPH dealers face increased competition from brick and mortar lenders and online deep subprime lenders. These lenders are accepting a larger share of consumers to finance for smaller loans than they would prior to the recession. BHPH dealers are a final destination for the least credit-worthy consumers who can’t get a loan anywhere else. This demographic is not easy to manage in collections anyway, which is typically why many BHPH dealers focus on repossession and resale more than on collections and service.

We get it. The competition to control financing is tough. Cash flow is tight. Inventory at auction isn’t what it used to be. You are competing for fewer cars with higher mileage and higher average cost per vehicle (ACV). However, BHPH dealers who focus on what they can control are faring better with customers and profits. A good place to start is to seek outside expertise from professional associations and your CPA.

Continue Reading: Focus on BHPH Business Model

Cornwell Jackson works with BHPH dealers frequently to adopt new approaches to service, cash flow and profitability. Review our previous whitepapers for your industry or contact us for a consultation. We can even assist with audits, reviews and compilations specific to dealerships to help your dealership access traditional bank financing or working capital if needed. We can also consult on timing and requirements to establish a related finance company as part of BHPH auto financing and portfolio management.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in auto, healthcare, real estate, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at or 972-202-8000.