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BHPH: What Big Money?

Written on March 1, 2007 by Scott Carlson

According to IndependentDealer.com, the typical buy here, pay here dealer produced a $1,213,236 annual pre-tax profit in the year 2005. Many of my successful buy here, pay here dealer clients make this kind of profit and more. That being said, some of them have asked me the question, So, I am making all of this money. Where is it? My response to them is, As long as you are growing your sales volume and adjusting your business model upward, you will be cash poor.

One of the biggest factors contributing to dealers being cash strapped is the tax law change that took place in the 1980s. The Retail Installment Sales Act requires that dealers selling and financing vehicles must pay federal income tax on the entire profit of the sale in the same tax year of each sale. This means that dealers will pay taxes on phantom income unless they circumvent the law via establishing a related finance company that purchases each of the retail installment contracts.

Assume that a given dealer takes on the task of forming a related finance company. Just because he has shifted the tax burden to the future, does not mean that he has met every challenge related to the funding of his business.

Actual Cash Value (ACV) Creep and Competitive Down Payment pricing will consume much of the high net profits in his BHPH if the dealer does not have a good handle on his business model. Most all dealers realize that the wholesale cost of goods for used cars is climbing. But, many have yet to realize the impact this can have on cash flow when coupled with the natural tendency most dealers have to move up in car cost as they grow their BHPH business.

IndependentDealer.com shows that the average ACV, average down payment and average number of annual retail units sold for 2005 were $3,288, $808 and 768 respectively. Lets assume that this was a specific dealers business model. If this dealer had allowed his average ACV to move up to $4,500 for 2006, he would have needed an additional $930,816 to fund his 2006 sales. This assumes that the dealer maintained the same average down payment and sales volume as he did in 2005.

In most cases, however, when a dealer increases his average ACV he usually insists on larger down payments. Assuming he did so, he could still have a cash flow challenge. Even if the dealer had produced an average down payment of $1225 in 2006, his average cash-in-deal would have increased. In other words, the average ACV of $3,288 minus the average down payment of $808 would have required the dealer to risk $2,480 of his capital on each sale. His total 2005 sales would have consumed $1,904,640 in capital. Using the same math, the dealers risk for each sale for 2006 would have required $3,275 in capital. Therefore, one can see that the total capital requirement for the 2006 sales would have been $2,515,200.

Failure to properly control ones BHPH business model can create a cash flow disaster. However, once sales growth levels off and the business model is well established the dealership can become a cash cow.

  • FAQ

    What exactly is AutoZoom's product or service?
    AutoZoom is a web-based predictive underwriting system designed to assist you with the underwriting and analysis challenges of the buy-here pay-here industry. AutoZoom has created a number of Scoring Models specifically for the sub-standard credit (buy-here pay-here) industry. AutoZoom includes management tools which utilize dashboards, charting, and exporting features to present data related to underwriting, sales, repossessions and associated cash-on-cash gains and/or losses in a very user friendly interface. Additionally, AutoZoom clients are able to issue Adverse Action Letters systematically when credit is declined.
    I already have underwriting guidelines. How is AutoZoom different?
    AutoZoom is only different in the way it applies number values to standard buy-here pay-here underwriting criteria, allowing those values to be used to make more precise and consistent underwriting decisions. AutoZoom is based on more than forty years of buy-here pay-here underwriting experience. Since buy-here pay-here underwriters typically do not use, or capture, numeric values with their credit decisions, they can know their underwriting produces good or bad results, but not why or how to improve their underwriting.
    Does AutoZoom's Predictive Underwriting make decisions for me?
    No. You are in control. AutoZoom simply provides you with numeric indicators that allow you to see more clearly the strengths and weaknesses of each prospective customer and deal structure. Someone will still need to make the final decision on each deal. Typically, upper management in your company will establish minimum AutoZoom numeric benchmarks. Underwriters then use those for approval, eliminating the need for upper management to be involved in every decision.
    Can AutoZoom help me if I am just getting started in the BHPH business?
    Yes. Any company that chooses to use AutoZoom at start-up will avoid the losses traditionally associated with the learning curve of the BHPH underwriting and deal approval process.
    How can AutoZoom help me in my business if I already consider myself a BHPH expert?
    AutoZoom has found that, regardless of level of expertise, all companies can benefit from using AutoZoom. Our larger clients have more than dozens of BHPH lots.
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  • Testimonials

    • AutoZoom has been helping Auto City make the right underwriting decisions since 2006 and we’ve found it amazingly accurate. We just started using the newest version, AutoZoom FLX, and we are completely blown away by the amount of data at our fingertips. It is absolutely the best scoring program we’ve ever seen. If you’re not using AutoZoom now, you should be. It’s underwriting made simple.
      • Blake Ingram, Owner
      • 4 Locations
      • 35 Years
      • Texas
    • Consistency is the key to stabilizing portfolio performance and ultimately increasing net profit. We have found that each underwriter brings to the table their own unique experiences and these variations in experiences can simply lead to higher default rates or missed business. AutoZoom lends itself to being an equalizer or sorts. AutoZoom’s effectiveness is not dependent upon the level of experience each underwriter possesses. AutoZoom provides a platform where the customer’s ability, stability and willingness to repay are evaluated in the same manner on each deal, providing a quantifiable mechanism for systematically assessing risk. AutoZoom takes the guess work out of the equation. We have used the model since 2006 and we continue to see improvements with our static pools and the overall performance of the portfolio. So, even if your company already has sound underwriting policies and procedures, adding an AutoZoom model should still bring about more improvements in your business.
      • Mark Bursey, Acquisitions Director
      • 9 Locations
      • 19 Years
      • Maine
    • How many deals have you made over the years that you wish you had just reached in your pocket and given the customer $100.00 to go away? With three years of solid AutoZoom information in our system now we are much better equipped to focus our efforts on financing those accounts that make the most sense. The real value of AutoZoom that is most difficult to quantify is how many thousands we have not loss because now we have a way to decline logically regardless of the customer’s down payment.
      • Kenny Loveless, Partner
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    • Properly used, AutoZoom is the best BHPH scoring system I have seen in my 25 years of experience and the analytical tools are AWESOME!!
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