Don't Think End of the Month!

If you truly want to finish the month strong or finish the year strong, stop thinking short-term and think “no-term.”

Instead, think about what it takes to be No. 1 and stay there. Think big. Dream big. Think about maximizing gross profit. Think about making every sale today. Then do it all over tomorrow. By thinking “end of month” and “end of year” your team will be looking at a “finish line.” And what do we all do after we cross the finish line? We rest! There is no time for rest if you want to be the best. Finish every month strong and every year even stronger by not looking at the finish line but rather by keeping your team focused on being the best. The score among the best is kept in dollars and cents. So, if you’re not getting those “five pound” deals ($5,000 gross profit) that raise your monthly average, take the first step and focus on deal structure. Stop leaving money on the table and make more money with your existing business and maximize your gross profit today.

The secret to maximizing gross profit in Special Finance is to minimize the risk of the loans for the banks. You do so by effectively structuring the deal for both profit and performance whereby “Cash is King!” Cash down absolves all credit sins. Cash down is also your profit. Sound simple? Yes! Is it believable? Yes! Is it true? Absolutely! The numbers of approvals the banks give, the collect ability of each loan and, your profits, will all increase dramatically if you smartly focus on deal structure before ever presenting the deal to the bank or the customer.

Everything about the deal depends on sound structure. Typically, when we car dealers submit a deal to the bank for approval, we maximize the amount financed and ask the bank for as much money as we think possible, expecting to negotiate downward. By doing so, we are making one of the most common and costly mistakes in finance. Most lenders screen deals for approvals using an automated system and an internal scoring model to save both time and money. These automated systems will quickly decline any deal that is structured incorrectly, thus limiting the options available to the credit manager and preventing a dialogue between the buyer and your finance manager.

Instead, get the approval first then negotiate (re-hash) with the bank. The days of asking for the moon, shotgunning deals everywhere just trying to see what sticks are over. To be effective today, finance managers must thoroughly understand the programs and underwriting guidelines for each lender and structure and submit deals accordingly with consistency.

These lenders are your business partners and the goal is for your Finance Manager to discuss each and every deal with the credit manager at the bank. Business is conducted by people and through relationships. So, treat your relationships with the banks as partnerships in profitability.

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 bank afford the risk? Can the dealer afford the profit margin?

The risk meter for the bank is LTV (Loan to Value), how much money the bank is lending in relationship to the book value of the vehicle. A high LTV is a high risk for the bank; loan approvals are inversely proportional to LTV. As you lower the LTV, you are actually increasing the likelihood of an approval by decreasing the risk of the loan. Debt to Income (DTI) and Payment to Income (PTI) are also ratios that the bank uses. DTI and PTI determine if the customer can actually afford the vehicle. This is why proof of income is so important for special finance deals. Together these three ratios determine the amount of risk for the bank and whether or not your customer gets an approval. Every lender will differ on the thresholds for each ratio and adjust interest rates accordingly for the loans they approve. It is how banks compete.

You will be amazed how competitive banking is today in the world of Special Finance. Just slow down the process and structure every deal in steps keeping profitability and collectability in mind; your approval rate will increase, your relationships with lenders will improve, and your gross profits will grow.

Remember, every deal has to be a “good” deal – good for the dealership, good for the customer and good for the bank.