No Cheerleaders Allowed!

In Buy Here Pay Here Startups and Business Planning … No Cheerleaders Allowed!

I managed my first business in the mid-80’s, partnered in one in the late 80’s, and opened one on my own in the early 90’s. I remember those days very well. In particular, I remember the excitement and anticipation of being my own boss.  I also remember the anxiety on the flip side, wondering if I had covered all bases in my planning and if my enthusiasm alone would be enough to guarantee success. 

Since then, I have opened several businesses on my own. Some failed. Others were and are very successful. Now, as a Buy Here Pay Here (BHPH) consultant who specializes in startups, I rely on that experience and I know very well what it is like to enter into a new venture. It is exciting and nerve-racking at the same time. There are things to do and important decisions to make. Too often in business – and my BHPH clients are no exception – we are surrounded by friends and family who care about us and want to see us pursue our passion or dreams. There is certainly nothing wrong with love and encouragement! However, when it comes to entering a business such as BHPH, it is important to thank the cheerleaders for their support and seek the advice of an expert – one who has direct experience in the field and who can prepare you for the good, the bad, and the ugly. In any business startup, I suggest folks seek consultation from someone who will scrutinize their business plan (really scrutinize it) and tell you exactly what you need to hear. Then you just have to listen! 

Certainly, as a consultant to those entering the business, I’d welcome the opportunity to be the voice of experience for anyone contemplating BHPH . But my objective here is to urge anyone who is considering BHPH to turn down the volume of the cheerleaders around them and seek professional advice from any of us with direct experience in the field. It is a great business! BHPH can be wildly successful when structured and capitalized properly. Of course, it also has hazards to circumnavigate! Cheerleaders will only be a distraction!

For those moving into BHPH there are several things to understand, most of which needs to be understood before spending a nickel on licenses, signs, or inventory. Here are some things that the cheer squad may not recognize: BHPH is about financing, not cars. It’s about cash flow before profit. It is about relationships more than it is about gross profit. And it far more about loan structure than it is about high grosses. Even the cheer captain may not know the first thing about underwriting poor credit buyers. Okay, you get it, professional guidance can be invaluable. 

Now that I have your attention, let me tell it like it is in the world of BHPH. Poor credit financing has risks! You already know that. You probably also know that  those who accept that risk and learn to manage it can experience tremendous rewards. However, did you know that this expert predicts your greatest risk will be in overhead and/or cash mismanagement?! What?! Not the portfolios of poor credit buyers? Oh, those portfolios can be a problem too if not created and managed properly. But my experience has been that the loss rates on these bad credit portfolios are predictable and manageable. That’s a very important thing to think about – the kind of thing that should give you the peace of mind that BHPH is a venture worth pursuing! I have plenty of dealer clients who will tell you that it is. And they’re not waving pom poms! It has been my observation that most who fail in BHPH did not have a good plan or did not stick to the plan when it comes to cash management. They let expenses get out of control or simply pulled off too much cash for other purposes, resulting in stunted growth or a backward skid. Their portfolios were performing as they always had and were not to blame. 

This is not to say that BHPH portfolios do not experience up and down cycles. They do. But the ebb and flow is usually in a predictable range. We just have to make sure we hold enough cash in reserve to work through those down strokes. And the keys to creating portfolios with less volatility, to use a Wall Street term, are underwriting (your approval process) and loan structure (the terms you provide to the customers). My suggestion is to write a plan that establishes and expresses policies in these areas. When you stick to that plan, your results will be consistent. These are among the things even our must trusted friends or business associates may not appreciate about BHPH.

We see dealers of various sizes and shapes running many different business models. They can all work great. So, if you are to offer in-house financing, it is essential to seek the advice or services of consultants and vendors who can get you off on the right foot. There are some “learn as you go” businesses out there. Some “cheerleaders” in your circle may think so, but I don’t view BHPH as one of them. Mistakes can certainly cost far more than the expertise.