Go with the Flow: How to Conquer Cash Flow Challenges

December 09, 2021

Cash flow is the greatest challenge facing Buy-Here-Pay-Here dealerships—here’s how you can conquer it.

Over the past few years, the subprime auto industry has experienced several significant market shifts. It’s important to understand the impact the capital markets, in which various entities trade financial instruments such as stocks and bonds, have on the funding options available to your dealership. Recently, the capital markets surged as demand from yield-thirsty investors grew to record-breaking highs. In fact, issuance of subprime auto asset-backed securities exceeded $30 billion – the highest levels in history – in both 2018 and 2019.

Sounds great, right?

Unfortunately, during that same time period and continuing into 2020, consumer auto loan delinquencies have also been on the rise. That has caused many speculators to pull away from the market, since investment returns have not been as lucrative as they had anticipated. This decreased demand in subprime auto loan originations has led to an overall drop in the accessibility of capital to the space.

Market Shift Impact on Lenders

With less capital available, a number of banks, specialty finance companies, note buyers and indirect lenders have pulled back funding or even closed their doors. And many of those that continue to serve the subprime space have tightened credit standards, lowered credit limits and charged deeper discount fees for dealership originations. That has often resulted in reduced profit margins and fewer sales for dealerships that serve subprime buyers. 

The consequence of the disruption in capital markets is that there are fewer options for consumers to obtain favorable auto loan financing. This has created less competition for Buy-Here-Pay-Here operators, who are finding more opportunities for in-house financing – and those originations tend to be with stronger borrowers. That’s helped sustain BHPH sales volume and has improved portfolio statistics overall.

Building on the promising trends of 2019, the BHPH industry was off to a strong start in 2020. And while the auto industry has faced the obvious challenges associated with the COVID-19 pandemic, numerous signs suggest the BHPH market has remained strong. After an initial slowdown, and with the help of federal stimulus payments, the Paycheck Protection Program and enhanced unemployment benefits, BHPH sales rebounded quickly and portfolio collections performance has even improved in many cases. In fact, the cash flow generated from the portfolio has helped sustain and stabilize many BHPH businesses in these uncertain times. 

Forward-Thinking Cash Flow

As bright as the future looks for Buy-Here-Pay-Here dealers, the fact is you’ll need to address what is likely the biggest challenge every BHPH dealership will face. Cash flow. Once you’re ready to commit to BHPH as a significant part of your business, you’ll quickly realize growing your portfolio is extremely cash-intensive. For dealerships that use banks or indirect lenders, the formula for success is simple. Sell a lot of cars and control expenses, and the rest will take care of itself. For BHPH dealers, the formula is much more complicated. 

Let’s look at the cash flow impact of just one BHPH deal:

In this example, the dealer takes a $4,000 cash flow hit in a single transaction. Now, multiply that by 30 sales per month over 12 months.

In this simple example, with an all-in cost of only $5,000 and 30 sales per month, the dealer will need $1.44 million in capital to simply cover the cost of inventory for a year. While profit is clearly the goal and an important indicator of the financial health of any business, cash flow is the lifeblood of an organization, keeping operations ticking on a day-to-day basis.

For a growing business, both cash flow and net profit are important. In the short term, though, cash flow is the most dominant concern. So the problem is clear. But what resources are available to solve that problem?  PrimaLend was founded in 2007 on the principal that BHPH Dealerships become dramatically more profitable when they can retain their retail installment contracts, and service those accounts to maturity.  With that, a Line of Credit which allows you to borrow against those accounts while maintaining full control and ownership is the best way to go!  Give us a call to discuss the details of your business and your goals.  We can help!  

Let’s Grow!