BHPH: Feeding The BHPH Monster

Long before I ever learned about internal rate of return, effective yield, relational databases, static pool analysis, the differences in repo rate and repo frequency, credit score modeling, audited financial statements, agreed-upon procedures audits, and a plethora of other things associated with building a publicly-traded sub prime automobile financing entity, I worked in my family’s BHPH business from 1969 to 1989 and experienced difficulties feeding the BHPH monster from inception.

We have all heard the saying, It takes money to make money. Anyone who has created a BHPH business will tell you that funding growth in their business is like feeding large amounts of cash to a money-eating monster. Funding BHPH operations is becoming more costly every year as vehicle wholesale values continue to increase. Recently, I consulted with a dealer who funded his BHPH business using very little capital and more than $400,000 in credit card debt. Though all turned out well for the dealer, I would not say that he used the ideal funding method. Fortunately, funding sources for BHPH dealerships are maturing and meeting the capital needs of larger dealers on a regular basis. Ten million dollar credit lines are no longer unusual in the BHPH industry.

So, what good is a funding source geared to large dealerships if a dealer is just starting out with a few thousand dollars and good credit? It is not much help now but it improves one’s chances of building a giant BHPH company in the future. Individuals who understand the money-making power of BHPH, and is willing to throw everything they have at it, stand a chance of becoming a powerhouse some day. Dealers owning automobile accounts receivables with the total principle balance exceeding $2,000,000 are now good candidates for multi-million dollar credit lines.

If a dealer learns the fundamentals of mastering 100 BHPH contracts, he possesses the core knowledge to eventually master 1,000 or even 10,000 plus BHPH contracts. However, knowing the basic fundamentals of buying, selling, and financing vehicles is not enough to secure lines of credit. Regardless of a dealership’s size, its owner must be able to demonstrate to potential capital sources that they understand all aspects of their BHPH business. They must be able provide reporting, statistics and analysis in comprehensive formats to secure even small lines of credit, unless the funding source is relying upon assets other than vehicles and auto receivables to secure the dealers debt.

As I have spent much of my time consulting dealers, many have shared with me that they started on a whim and/or shoestring. The ones that have become most successful were able to demonstrate early on that they had control of all aspects of their business. Many went to friends and family when they first needed more money to feed the BHPH monster. Eventually, they moved up to local banks that normally loaned each less than $1,000,000. Some built their client-base principle balance to above $2,000,000 and were able to demonstrate that they were in control of all aspects of their business. This enabled some to secure multi-million dollar lines of credit.

I have learned that in most cases, dealers who are willing to invest the time and money required to have audited financial statements completed by regional accounting firms early with their business, will come out far ahead of the others when pursuing large credit lines. Dealers that utilize strong relational database technologies and credit scoring systems have a better understanding of their business and are more able to direct extreme growth that usually goes hand-in-hand with large credit lines.

If you are not taking the action steps required to benefit from a multi-million dollar line of credit now or in the future, I would be glad to talk to you about why you should.