The Pros and Cons of 5 Common Capital Sources for BHPH Dealers

December 03, 2021

At some point in the growth phase of a Buy-Here-Pay-Here auto dealership, it will inevitably happen: cash flow problems will start hindering expansion.

This can happen relatively early on, or it can happen after years of established operation. However and whenever they manifest, there is but one solution to solve all cash flow problems.

That solution is capital.

But, not all capital is created equal. For Buy-Here-Pay-Here dealerships that have assets to leverage, funding opportunities abound. In this article, we’re taking a closer look at five of the most common capital sources and evaluating the pros and cons associated with each.

After reading this article, you’ll have a better understanding of what financing options are available to you, and you’ll be better prepared to make the best funding decision for your dealership.


Many BHPH dealers start out by self-funding their new originations, which often leads to raising additional capital from through investments or loans from friends or family.

Pros: Clearly, this is the most cost-effective method to finance your business. It often allows the owner to retain the majority – if not 100 percent – of the company’s equity.

Cons: When access to capital is limited, this can be a very slow way to grow. It can also be difficult to continue raising the additional capital needed to support further portfolio growth.

Day-to-day business considerations are often influenced by the cash flow shortage, which can lead to poor decisions. For example, providing customer loan approvals based solely on large down payments, as opposed to sound underwriting, is generally a bad idea. Capital constraints also frequently lead to compromised quality of inventory.

The inability to buy quality vehicles at auction can have a negative impact on the business in several ways, including the pressure it can put on your service department to recondition the inventory. If that leads to under-reconditioned inventory, it’s likely to increase loan defaults or put even more pressure on service to keep those sold vehicles on the road.

Sale of Bulk Receivables/Notes

Another common way to fund a BHPH operation is to periodically sell notes in bulk.

Pros: Maintaining a positive spread between the cost of originations and the purchase price of the notes can allow you to create early profits and potentially fund future originations at the same time. This can be a good option for dealers who want to maintain a limited staff and prefer not to invest in growing their collections and service departments as the portfolio grows.

Cons: Periodic setbacks following a note sale can stunt the growth of your portfolio. In addition, selling notes can cost a BHPH dealership one of its most effective advantages – the ongoing relationship built with its customers through regular collections, which often leads to repeat and referral customers. When those relationships are lost, so are those sales. And note buyers tend to select the best performing accounts to maximize the purchase price.

While that allows dealers to sell fewer notes to raise the capital they need, it also leads to performance degradation of the remaining portfolio, which becomes more and more pronounced with each bulk sale.

Payment Streaming

Payment streaming, or PIPP programs, are similar to bulk sales, but the programs allow dealers to sell off only a portion of the loan or a series of payments over a specified period of time (commonly six, 12 or 18 months).

Pros: The dealership receives a cash advance for the agreed-on payment interval. Typically, the lender manages collections during that period, but the dealer ultimately retains the customer when the payment stream has run its course.

Cons: A discount is applied to the payments purchased in advance. The transfer of loan servicing is commonly considered a period of vulnerability for the loan and the likelihood of default increases significantly. The transfer of account servicing can negatively impact the customer experience and ultimately the relationship. This is likely to reduce customers’ motivation to provide leads or make a repeat purchase.

Traditional Banks

Banks can provide revolving lines of credit or even small business term loans for receivables growth.

Pros: The lowest cost of capital in the industry.

Cons: Banks have much higher underwriting standards than other capital providers in the BHPH space. They generally require many years in business, audited financial statements, strong net worth owners and seasoned portfolio performance. As a point of reference, most banks are looking for dealers with a minimum of five or more years in business, multiple years of consecutive profitability and a balance sheet exceeding $10 million. While there are exceptions to every rule, that’s typical in the marketplace.

Specialty Finance Companies

These are commercial lenders that offer revolving lines of credit backed by BHPH receivables.

Pros: While the borrowing cost will be higher than a bank, these lenders are generally more cost-effective than all other capital financing options. With a revolving line of credit, dealers retain and service their customers, maintaining that relationship for the life of the loan. Happy borrowers are a BHPH dealer’s best resource for new leads and often prove to become repeat customers as well.

Specialty finance lenders offer more flexible underwriting guidelines and less conservative advance rates than traditional banks.

Cons: Accelerated growth is exciting, but it also creates challenges, and it’s important to be prepared for them. The most obvious challenge is maintaining and improving portfolio collections performance. If you double the number of your accounts, there’s likely to be a similar increase in the number of delinquent accounts that need the attention of collectors to keep them on track. So your preparation should include guidelines that will make the collections process as efficient as possible, as well as forecasting the need for additional staff.

When you’re rapidly growing the number of your accounts, the new originations and down payments can also hide deficiencies developing within the business. Staying ahead of the curve and the increased demands portfolio growth places on the service department, sales, accounting and office administration is vital to success.

The PrimaLend Alternative

Knowing you have a reliable capital partner will help you overcome the various obstacles you will face as a BHPH dealer. It’s for this reason that PrimaLend serves not just as a source of capital for dealers, but also a trustworthy advisor that can think outside the box with your growth in mind.

The above list of pros and cons is not 100% complete. There are other ways to boost cash flow to fund your expansion goals. At PrimaLend, we specialize in developing creative lending solutions that leverage assets in three key categories:

  • Receivables
  • Floorplan/Inventory
  • Real Estate

It’s quite possible that you qualify for a commercial loan from PrimaLend even if other banks or financial institutions have said ‘NO’. The only way to find out is to contact us.

We look forward to hearing from you!