2009: Year of BHPH?

Will 2009 be the year for the buy here-pay here dealer? While many of the indicators point to the dealer-financing model as being the one bright spot in automotive retailing in the coming year, there are challenges but excellent opportunities as well.

Chuck Bonanno, executive vice president and senior partner of the Leedom Group, LLC, based in Sarasota, Fla., said buy here-pay here dealers should see more customers on their lots, less expensive inventory (to a degree) and a good selection of personnel as dealerships across the country shutter their doors.

“We will certainly see more customers in our segment of the market,” said Bonanno, who has more than 250 buy here-pay here dealers in the Twenty Groups he moderates. “That, however, does not necessarily mean that they will be a better quality customer.”

He said that customers who have either lost their job and taken on a new one at a lower salary or have experienced a foreclosure will be showing up on buy here-pay here lot because they cannot get financed at a Suzuki, Mazda or Isuzu new car store any longer.

“These customers may not be of any better quality than the customers who typically show up on our lots,” Bonanno said. “They have different expectations when there are mechanical issues, for instance. They’re going to be a tougher crowd.”

The other thing is that these customers have grown accustomed to having more money. Suddenly, there will be no raises, no overtime and they won’t be able to turn to their credit cards.

“Dealers who shift their business model by adjusting their underwriting or increasing the ACV of the vehicles they put on their lots to try to accommodate this so-called better quality customer had better examine their decision carefully,” he said.

One of the challenges facing buy here-pay here dealers in the coming year is difficulty securing new capital.

“Those with enough capital or ready access to capital will have a better chance to capitalize on the growing customer base,” Bonanno said. “Access to capital is about non-existent right now.”

He said as car sales have plummeted at new car stores, so have the value of wholesale inventory. However, the cars buy here-pay here dealers typically need come from new-dealer trade-ins, and that “factory” is closed right now. Cost of wholesale inventory may be down right now overall, but cars buy here-pay here dealers need, those in the $1,000 to $3,000 range can be difficult to find.

In the past several years there were a number of attempts at publicly traded firms to buy up buy here-pay here chains. Several of them failed miserably, leaving in their wake a great deal of financial and human carnage, as well as a negative image for the industry as a whole.

“It’s not consolidation from big publicly trade firms that is the issue right now, it’s the big players getting bigger and the smaller ‘mom-and-pop’ shops having a tougher time competing,” Bonanno said.

Eric Combs, vice president of sales for Dealers Capital and Dealers Finance, based in Roswell, Ga., said as subprime has tried up dealers on the lower-end of the food chain well do well in 2009, if they have solid business models.

“A lot of franchise dealers right now are looking at buy here-pay here as a great idea,” he said. “The question becomes can the weather the storm at the franchise location, and still have enough capital to make a go of a buy here-pay here business.”

Dealers Finance provides capital to smaller buy here-pay here dealers in exchange for buying a “strip” of the dealer’s portfolio for 12 months at about 75 cents on the dollar. This frees up capital for the dealer to grow his portfolio faster than he would be able to without the influx of cash.

“It’s been one of our best years,” Combs said. “We look carefully at the dealers we do business with, and make sure they have skin in the game, a solid business model and good collections team and we like to see them use the payment assurance technology.”

Combs said that they look for dealers who sell the right inventory at the right ACV. He said dealers are often convinced they can get a better caliber of customer by selling higher-end vehicles.

“It just doesn’t work that way,” he said. “Dealers can make a lot more money with $400,000 of inventory than they can with $750,000.”

Combs predicts a banner year for “established” buy here-pay here dealers in 2009.

“It could be very tough if you’re starting out in this business and need capital,” he said. “There is going to be a lot of competition out there as well, especially as time goes on and access to credit continues to be a major concern.”

Gary Page, owner of Small Dealers Assistance (SDA), based in Atlanta, Ga.,

said he believes buy here-pay here could be a mixed bag for dealers in 2009.

Page’s business provides capital to buy here-pay here dealers. SDA typically funds up to $1 million in receivables.

“Inventory is much more affordable, at least right now, and buy here-pay here dealers are seeing more customers,” Page said. “Everything is lining up, however, we’re also seeing more job losses, and access to capital has dried up.” Increasing unemployment shouldn’t be too much of a problem for buy here-pay here dealers because their customers typically move from job to job.

“If Circuit City goes under, they just move to Best Buy,” Page said. “The concern is with the trades, especially the Hispanic market. When construction dries up, the Hispanics can’t find other work.”

He said in his area of Georgia a number of dealers have reported seeing customers return to Mexico, often with the vehicle they sold them.

“A little bit of this is because of the tighter immigration laws, but mostly it’s the result of no jobs available in the construction trade,” Page said.

Page said he’s spoken with a lot of dealers that he’s not spoken with in years. Dealers are calling his company, wanting to know what type of capital is available to them.

“Our phones are ringing and we’re speaking to customers we haven’t spoken to in a long time,” he said. “Fortunately, we’ve been around for 20 years and we’ve spoken with a lot of people.”

In the past two months, SDA has seen a significant spike in the number dealer applications he’s received.

“Rejections are up as well,” Page said. “We’re picky and choose about the dealers who we’ll do business with. We have to be. Many people are having difficulty in the businesses and personal lives right now.”

Page said 2009 should be a solid year for buy here-pay here. “There’s a lot of uncertainty for us in the buy here-pay here world as well,” Page said. “We’re looking for dealers who are not highly leveraged, have good collections and a good business plan. If you have all that 2009 should be a great year, otherwise you may not survive.”