BHPH – License To Print Money
Having spent the last five decades in the BHPH industry, I have learned that BHPH is a license to print money–if properly managed. My family and I started our first BHPH lot in 1969 with $500 borrowed money and minimal industry knowledge. Since then, our combined efforts over the years have yielded in excess of $2 billion dollars in total BHPH receivables.
BHPH is coming of age. Those who learn to manage the risks of BHPH through the use of tried and true methods and evolving technologies will create fortunes. When growing a BHPH business, it is vital that you start with or change to the best dealership management software available today. Information is the key to properly managing your BHPH business.
Additionally, standardized underwriting and BHPH credit scoring are proving to be a beneficial component for competing in the current market. BHPH customers are becoming more spoiled every day. Prospective buyers are expecting a lot more cars for a much lower down payment. Considering the cost of a good BHPH vehicle these days, your company’s ability to more consistently and accurately decision deals will determine your degree of success in the future.
In order to maximize your BHPH business, consider the following:
Most dealers get their start in BHPH offering vehicles with ACVs of $4,500 and less. While the yields associated with these vehicles can be impressive, the challenges related to the vehicle’s condition can be cumbersome. The sweet spot in the industry is an ACV range of $6,000 to $8,500. Realize that the greater the spread between the cost of the low-end and the high-end vehicle, the greater volume and range of customers you will attract and close. The goal in BHPH should be to match product range with your ability to fund your business.
Markets vary across the nation. Where there is less competition, customers are willing to pay larger down payments. Therefore, dealers are able to recover more of the cost of the vehicle at the time of sale. Contrary to popular belief, the size of down payment has very little to do with the performance of the note, unless you are dealing with extreme low-end customers. Utilizing BHPH scoring enables dealers to more accurately match customers with dollars at risk or cash-in-deal. Industry leaders are learning to sell more cars for a lot less down.
In BHPH, just as in banking, there will be repossessions. Dealers do not create repos. Most repos are a result of the following: good people with poor means and good intentions, ultimately not being able to pay in a timely manner, mechanical failure, and/or physical damage. While the repo rate (number of vehicles that ultimately come back as compared to the number sold) is an important factor to measure in your business. A 35% to 50% rate is not alarming, depending upon wholesale car cost ranges and financing term at origination.
Frequency is much more important than the repo rate. The months in which the repos occur can make or break a BHPH dealer. 80% of all repos traditionally occur within the 12 months of the life of BHPH originations. Repos usually peak during the third 90-day period of the installment contract. BHPH scoring enables dealers to build portfolios that have repos peaking in later periods. To maximize sales, dealers should target a 35% to 45% repo rate, coupled with a repo frequency peaking in the third or fourth 90-day period following retail installment contract origination. A protracted frequency will minimize losses traditionally associated with a higher repo rate.
Measuring dollars paid prior to repossession plus the ACVs of the vehicles repossessed. Next, include all of the dollars paid on the good accounts to help determine a portfolio’s overall collectability. Comparing that result to the total dollars to be paid by customers on all contracts originated (including both the amount financed and interest) will result in a ratio. On average, BHPH dealers realize 70% to 75% collectability. Through the use of today’s technologies, dealers are pushing all the limits in BHPH without compromising collectability. Dealers should target collectability in the 80% to 85% range, while at the same time pushing the limits on repo rate and properly managing repo frequency in order to maximize sales.
The master plan of BHPH should be to keep your customers paying your dealership for a minimum of ten to fifteen years by providing the broadest range of products for the lowest down payment. Draw on the experience of industry experts and utilize evolving technologies to grow your BHPH business. Those who do so may far exceed their wildest expectations of growth in their businesses, as did my family and I.