When Advantage Funding co-founder Ed Kaye makes a presentation to buy-here, pay-here dealers, he often begins with a list of seven questions for them to consider. Before going any further, Kaye recommends that operators stop finance companies from going any further unless they can explain their programs in a concise, understandable way.

“We believe that there’s a lot of misinformation to buy-here, pay-here dealers in the finance market,” Kaye said. “Dealers always come up to us and tell us that they didn’t realize what they were getting themselves into with one lender or another or they had no idea of what the implications were in establishing a relationship with certain lenders. They didn’t understand the fine print.

“These seven questions were kind of a theme that many of the dealers were bringing to us. We felt that if we could share this information with dealers, it would be helpful,” he continued.

While Kaye emphasized that all seven questions should be considered, he noted that the first one is most important.

“If the program that the lender is offering the dealer is very complicated — and most the dealers are very bright guys — but  they can’t understand how they’re going to get paid or where the money goes in very simple terms, because the reality is here we’re not doing rocket science here, then they should question whether or not that’s the right lender for them,” Kaye said.

“They’ve got to completely understand what they’re getting themselves into,” he went on to say.

If a BHPH operator decided to proceed through the complete presentation Advantage Funding typically makes, Kaye shared what he usually does during those sessions — telling dealers why his company is different from many operations.

“Our business model at Advantage is always to go after the second tier of the market,” Kaye said. “We found that the prime top-tier targets, transactions in any of our asset classes, are the least profitable. The bottom tier may have the largest profit margin, but on a possibility standpoint, they don’t always perform and therefore there’s great risk.

“So we like to position ourselves in the market just under the top tier credit,” he continued. “Therefore, we know we can’t help the big franchise, 200-store, buy-here pay-here operators. They don’t need us. They have access to their own capital that’s probably cheaper than ours. Therefore, there’s not enough margin for us to attack that market.

“But there is a huge opportunity for us to establish a place in the second tier,” Kaye went on to say. “Those are usually your smaller mom and pop buy-here, pay-here operators with good credit and good track records, transparent financials. They have all of the indicators that they will continue to succeed.”

One of the most important part of the criteria to establish a relationship with Advantage Funding is for BHPH operators to be in business for at least three years. Kaye explained why the company shies away from dealerships that might be still considered “green peas” in the BHPH industry.

“It’s mandatory that they have prior experience. We are not able to fund any start up buy-here, pay-here operators. But we are very aggressive in funding established smaller companies. And when I say established, we just want a minimum of three years in business,” he said.

“If they’re in business for less than three years, and they don’t have a three-years story, we can’t help them.”

An example of an operation that took the capital available and expanded is Craig’s Auto and RV, which has three locations in northern Michigan. The operation opened its doors in 2004 with Magnum Finance as its related finance company specializing in working with deep subprime customers who have difficulty accessing credit.

Then in 2008, Magnum Finance experienced a credit pinch of its own following the retraction of the financial industry. The company’s lender exited the market, leaving Magnum to self-fund.

“We put as many new loans on as our cash flow allowed, and it’s typical to see about 24 percent of the loans we finance go bad,” Magnum chief finance officer Erin Wilson said. “We pay off our vehicles when we sell them, and our cash flow comes off that cash receivable. But if we’re unable to originate new loans faster than those loans are charging off, it’s very difficult.”

Despite that hardship, Magnum Finance persevered through the Great Recession, self-funding in an effort to continue serving customers. Even so, the company was unable to keep up with business demand.

“No one would lend to our industry,” Wilson said.

Then in September of last year, Magnum Finance principals Dennis and Ryan Craig met Kaye and fellow Advantage Funding principal Michael Kaplan.

“Dennis and Ryan told Ed and Michael our story,” Wilson said. “They told them how we’d navigated the recession and managed to keep current our financial obligations.”

Kaye and Kaplan told Magnum Finance executives they could help by providing per-vehicle funding. In exchange for loans fitting a specified target market, Advantage Funding would pay Magnum Finance the cost of each vehicle financed plus a warranty and service fee when applicable.

Now, more than one year later, Magnum Finance and Advantage Funding have a close working relationship.

“Advantage Funding has been wonderful,” Wilson said. “They provide quick turnaround and consistent, high-quality service. They look not just at financials, but at your overall picture. They’ll work with you to get past your own hardships, just as we do with others. They understand the business, with its ups and downs. They’ve helped us continue to successfully serve our customers and our community.”

While there are success stories such as Magnum Finance, Kaye cautioned that some BHPH operators might not be as fortunate, especially if they don’t understand the commitments and requirements coming from their finance company or they’re originating contracts with vehicle buyers who are prime candidates for default.

“There’s always going to be competition. The strong operators, even the smaller operators who are financially sound, stick their knitting and understand the business and their market, will survive when the big boys are chasing stupid deals,” Kaye said. “But you have to have the wherewithal to wait it out … that’s why we go after established dealers that are sound financially.

“As long as the good operators will choose their battles and choose their deals to write, stick to their criteria and do the things that keeps them out of trouble, they’ll do fine, and we’ll be able to continue to support their business and help grow it,” he continued. “Once dealers start to chase bad deals at low rates with thin margins in this market, it’s a recipe for disaster.”

7 Key Questions About What to Expect From Your Lender

1. Can you provide a simple yet complete understanding of the programs you offer?

2. How do you differ from other lenders in this space?

3. How much do you advance on each transaction or portfolio?

4. How long does funding take?

5. Are there any fees involved in the line approval process?

6. What is the average size of the existing portfolios you fund?

7. Do you fund both BHPH and LHPH?

Source: Advantage Funding