Pelican Auto Finance is using what executives describe as a “crawl-walk-run approach” to growth in the deep subprime auto financing world. And they want to start running to the point where the company’s portfolio ranks among the top five institutions nationwide, blending together a business strategy of being an indirect lender for franchised and independent dealers to tap as well as a purchaser of paper from buy-here, pay-here operators.

“Right now we have significant capitalization behind us,” Pelican chief executive officer Troy Cavallaro told SubPrime Auto Finance News.

“I think a year from now we’re going to be well positioned to be one of the top four lenders in the deep subprime space,” Cavallaro continued. “I understand that Westlake’s portfolio is well over a $1 billion and Credit Acceptance’s portfolio is well over $1 billion. We don’t expect to get there in the next 12, 18 or 24 months. But we think we can position ourselves to be the No. 4 or No. 5 deep subprime lender in the nation. That’s our goal is to get there.”

To reach that goal, Pelican first had to complete that crawling stage. Cavallaro indicated that process entailed the licensing process, acquiring new physical facilities and collecting a group of senior managers and other personnel.

The walking stage included the building of a new scorecard. Cavallaro explained that new in-house proprietary scorecard was based on “rational analysis we did and making sure the static pools were in line” for the $50 million in receivables that came with the company’s predecessor, Pelican Resource Group.

Cavallaro then mentioned that late last year, Pelican Auto Finance closed a bank facility with an institution he called “a large national provider.” He noted that it’s a senior debt facility that has potential to expand to $50 million.

That facility coupled with the agreement Pelican Auto Finance reached with Flexpoint Ford last February on the option to invest up to $50 million is part of the reason why Cavallaro said, “We’re in a really prime position at this point to grow and make an impact nationwide.

“This year’s task is to run,” he added.

Pelican Auto Finance is already up and running in 24 states. Cavallaro noted that the company is making inroads into the Carolinas, Georgia and Texas from beyond its position of strength in the Northeast and Mid-Atlantic. Pelican Auto Finance plans to grow on the West Coast next year.

Cavallaro described Pelican Auto Finance’s core product as an indirect lending solution for deep subprime buyers who are purchasing vehicles that retail for $12,000 or less. The majority of the company’s dealer network consists of independent dealerships, but the level of franchised stores has risen from 10 percent to 20 percent during the past few months.

“What we’ve noticed is the fact that there are so many more franchises today that want to get involved in deep subprime,” Cavallaro said. “I’m seeing a trend that there are more franchises holding onto their better older wholesale pieces and using them to develop a subprime department to get a deeper reach. So that 8- or 9-year-old Honda Accord that they would wholesale out but it runs great, these dealers are now keeping that car and selling it to someone who is deep subprime and maybe generate some additional business through referrals or other opportunities.

“That’s pretty significant going from 10 percent to 20 percent as franchises,” he continued. “It’s being driven by the franchises becoming more educated and holding onto these better trades and not only selling more cars, but also generating more referrals, as well.”

Meanwhile, Pelican Auto Finance also is looking to expand what it considers an ancillary add-on part of its business strategy, purchasing paper from BHPH dealerships. Cavallaro also shared how the company is approaching this segment.

“I would say there are two categories of BHPH transactions. There is the bulk purchase we’re all familiar with. Then there is another type of thing called a BHPH partner relationship,” Cavallaro said. “The difference is you have some of the bigger BHPH outfits that amass these portfolios and sometimes, they’re $500,000 or $1 million or $2 million, and they want to sell them in one lump sum. That’s what I would classify as a bulk purchase.

“That’s not really where we want to go,” he continued. “A lot of lenders, they go after those portfolios, and that’s a lot of their core business. We look it at it as that’s not a sustainable model in terms of continual growth. These larger players in the bulk purchase model are selling maybe once a quarter or semiannually or annually. They’re really just selling to the highest bidder. But there’s not a real relationship there.

“What we’re really focused on is the BHPH dealers that want to develop a relationship and instead of selling large masses, selling to us on a regular basis, be it monthly or bimonthly,” he went on to say. “It’s a different type of relationship. We’re looking for a different segment of that BHPH dealer business.”