With the tightening economy, many independent dealers are finding it increasingly difficult to secure additional capital.
Before dealers consider renewing or increasing their line of credit, there are three principles for them to consider and make sure they are addressing - the three Cs.
“Compliance, collections and communications,” said NIADA 20 Group Moderator and Consultant Brad White.
Before joining NIADA, White served as the Franchise Consultant with JD Byrider, one of the nation’s leading used car and finance companies, with more than 150 locations. He guided franchise operations, enhanced dealer profitability, and ensured compliance with corporate standards.
He also held the position of Director of Sales in Advertising & Marketing for BHPH dealers, developing and implementing strategic marketing initiatives to boost dealership visibility and customer engagement. In addition to his consultancy and marketing roles, White has hands-on dealership management experience, progressing from general manager to CEO, overseeing large-volume, multi-location dealerships.
Working with new and veteran dealers, White has seen the challenges that dealers have faced in borrowing. However, forming a solid business plan that addresses the three Cs is the start of finding and maintaining financing.
“A business plan is the biggest piece for a new dealer when looking for funding,” White said. “Lenders have different covenants. Whenever the lenders are looking at these business plans they are looking at what kind of vehicle you are selling. What’s the cost of that vehicle and interest rates? From there, they are looking at your inventory, and how many cars you’re looking to sell. What is your need as far as a line of credit?”
The business plan quickly funnels into the first C – compliance. The lenders want to make sure the dealers they are choosing to go into business with are complying with federal, state and local laws, rules and regulations. That includes having written policies to address protecting consumer data and discriminatory or predatory lending. Dealers also need to make sure notices are being sent to customers on time.
“You need a clear strategy for compliance. Every location should have a compliance management system,” White said. “That’s clear processes and procedures whenever it comes to compliance.”
The second C, collections, needs to be in order. Loans all have covenants requiring 30-day delinquencies to stay under a certain level. The threshold may be between 3 to 6 percent. All accounts 31 days or more past due will be considered an ineligible receivable and count toward the threshold. Lenders want to see growth in eligible receivables.
Chargeoffs are also in the covenants and need to be kept as low as possible.
“Lenders are going to be looking at the growth of the eligible receivables. That ineligible bucket can harm you whether or not you get another line of credit or not,” White said. “They’re looking at your default and your performance on current loans.
“You want to try to keep your charge-offs right around 1.1 percent or less.”
To explain, White said if your portfolio is $10 million and your 31-day plus delinquencies are at $1.2 million, your eligible receivables are down to $8.8 million that you can borrow against.
“You can’t borrow against the 1.2 percent that is ineligible,” White said.
He pointed out that dealerships performing poorly on collections can start struggling when they try to borrow more money to make up for what they are not collecting.
“They become more leveraged. Most dealers try to stay around 25 percent being leveraged to their bank on their line of credit,” White said.
Being overleveraged and out of compliance with your current loans will make it harder to secure another line of credit.
The third C is communication. Communication is a two-pronged approach with customers and your lender.
Communication with BHPH customers can be difficult. Relationship building at the time of the sale helps lay the groundwork to keep a customer communicating about any issues arising and on ways to keep an account current.
“We can control that 30-day plus by working with customers,” White said. “A lot of times, it could be just trying to get the customer back on track. There are multiple ways to do that whether we work with them, take half a payment, or do some kind of fresh start program.”
White said you want to work with the customer but also address the long-term sustainability of the contract.
The other prong of communication is with your lender. Like with many of your customers, things happen. There may be expenses, personnel changes, or a variety of factors that may impact your ability to stay within the covenants of a loan on compliance, collections or simply pay. You need to be forthcoming and communicate with your lender on any issue. You don’t want your lender chasing you or having issues contacting you about issues. It is far better for the bank to hear about issues from you as soon as possible. White said lenders are more willing to work with you if you are proactive.
“The problem is when you procrastinate. You think, ‘I’m in trouble and they’re not going to understand,’” White said. “You’re so worried about their response. You procrastinate until the last minute and that makes you look bad to the bank or funding company that’s helping you out with your line of credit. If you are proactive, it always helps. They understand the situation you are in.”
Clear communication with the lender also helps protect your reputation and can lead to the current lender being a powerful reference for additional lines of credit in the future.
“That referral from your current lender always comes in handy because the new lender wants to know that you communicate, you care and have systems in place to protect yourself and the loan,” White said.
The time to start addressing the three Cs is now and not when you are looking to renew or add to your line of credit. Planning and putting processes in place to address compliance, collections and communications will not only help secure capital but set your dealership up for success.
