Capital for Buy Here-Pay Here: Steps to Getting a Line of Credit

The current state of the Buy Here-Pay Here industry requires that dealers will and do require huge amounts of capital to start and grow their business.

The typical start-up business needs $500,000 or more just to produce 15 to 20 average deals per month. Many of my clients are well established and are in a positive cash flow position at current sales levels. They need capital to grow their businesses. So the question is, “Where do you get the capital and how do you get the capital?”

This article will deal with the “how to acquire capital” part of that equation. First, dealers need to understand why it is difficult to get traditional lenders excited about this business model. You are in the business of lending money to consumers traditional lenders would NEVER lend to and you are doing so on vehicles they would NEVER finance.

This is a tough sell made even harder when you have never borrowed large sums of money before. You are a HIGH risk loan by banking standards. You will most likely NOT qualify for “prime” borrowing rates. You need to move past that point. You need access to capital first and foremost. As you prove yourself over time, you can negotiate better terms.

In order to secure lines of credit through the institutional lending world, you will need to do your homework, gather all documents, licenses, tax returns and the like as well as produce operational standards for your lending and collecting activities. You need to show the prospective lender your business model including how you intend to use the funds and more importantly, demonstrate a business model that will produce enough profits (positive cash flow) that you will be able to pay back the loan or de-leverage the line via organic growth of the portfolio.

In order to prepare a loan package for a lender to consider you will need to assemble a “laundry list” of items needed to make a lending decision. The following list is a standard underwriting list which may or may not be comprehensive enough to make the decision but is typical in most cases:

• Three or more years of tax returns

• Three years of financial statements including income statements, balance sheets and cash flows if available. Reviewed statements are normally acceptable but certified statements are better.

• Personal Finance Statement of Company Principal

• Copies of current & valid licensing required to conduct business in your state(s)

• Proof of NO pending lawsuits, judgments, or legal action of any kind

• Proof of Clean Credit (Bureaus, Dunn & Bradstreet, UCC, etc…)

• Executive Summary of Business: Senior Management Resumes, Company History and Description of your Business Model including Marketing, ACV niche and Business area demographics plus any unique traits that provide you with a competitive edge

• Pro Forma Financial Statements outlining use of funds and results of these proposed borrowings via balance sheet, cash flow and income statement projections

• Written Policy and Procedure Manual – A detailed and ACCURATE underwriting guideline list is the minimum requirement

• Recent history of delinquency levels, charge-off rates and loss to liquidation ratios or collateral recovery rates

• All Dealer Management System reports generated and employed to conduct business and manage loan portfolio

• Loss experience defined by static pool analysis – Not usually required but highly recommended

These are the typical items necessary to underwrite a line of credit. The list your lender requires may be shorter or longer but will most assuredly include most of the above items. The lender will also verify all of the above information on their own through a due diligence process so the above items MUST be accurate and current. Most lenders will do an onsite visit of some sort. Please be prepared to show off your facilities, your systems, and most importantly your people. I cannot overemphasize the importance of this “interview” process but as a Buy Here-Pay Here dealer you know this already.

Like most lending scenarios, your ability to acquire a capital line and your ability to manage that line will make it that much easier to secure a larger line or a better rate in the future. So my advice is to do your homework, know your business, take great care of your line and “bank” and you will be given the opportunity to grow your business, your profits and your net worth.