In the world of Buy Here Pay Here (BHPH) dealerships, maintaining strong cash flow is key to success. That’s why, despite the fact that BHPH dealers generally specialize in in-house lending, some are choosing to sell auto notes as a means to fuel their operating funds.
While this strategy can seem lucrative, offloading receivables comes with its fair share of drawbacks. Let’s explore the pros and cons of selling auto notes, and how dealerships can make an informed decision.
What Does It Mean to Sell Auto Notes?
Selling auto receivables is becoming an increasingly popular business strategy among certain BHPH dealerships. To maximize return, dealers typically pick out seasoned loans, generally six months after issuance. If they wait until a loan is delinquent, they’ll have to sell it for a fraction of the cost– and that’s if they can even find a buyer.
From there, most dealers will pull their notes into a bulk portfolio, along with consumer data including payment history, credit score, and vehicle details. Once the loans are sold, the buyer will have the right to collect on the debts, therefore taking on the risk and revenue tied to each one.
The Benefits of Selling BHPH Notes
1. Immediate cash flow
One major advantage of selling auto notes is the quick influx of cash it provides. This immediate liquidity can be a game-changer for dealerships looking to expand their inventory, cover operational costs, or invest in growth opportunities. Instead of waiting for customers to make payments over several years, dealers can access a lump sum upfront, albeit at a discount.
2. Reduced risk
By selling auto notes, dealers effectively transfer the risk of default to the note buyer. This can be particularly beneficial in uncertain economic times or when dealing with higher-risk customers. It can also help businesses maintain their target risk threshold if their portfolio gets too volatile.
3. Decreased administrative overhead
Even for BHPH dealerships with robust collections departments, there’s a limit to how many accounts you can manage. Offloading some of your portfolio can reduce the burden on your internal team. It can also give your collections manager more time to focus on other responsibilities like compliance, negotiation, or staff training.
The Drawbacks of Selling BHPH Notes
1. Reduced long-term profits
When you sell receivables, you can only collect on a fraction of a loan’s expected value. That means that even if it provides immediate cash flow, the end result is often less lucrative. This can significantly impact long-term profitability, especially for well-performing loans, which are more likely to attract investors.
2. Reputational risks
When notes are sold, the ongoing relationship with the customer often transfers to the new note holder. That means that you’ll have no control over or visibility into customer communications moving forward.
In the worst case, selling notes to an aggressive or unscrupulous debt collector could damage your reputation with existing customers. But even in the best case, transferring your accounts can limit opportunities for repeat business, referrals, and additional services like maintenance or trade-ins.
3. Compliance challenges
BHPH dealers are subject to strict regulatory requirements, including the FTC Safeguards Rule. Within these guidelines, businesses are responsible for the actions of their third-party vendors, which means that any security violations will be held against the dealership. This can lead to costly lawsuits and fines up to $51,744 per violation.
How Insurance Monitoring Can Curb Financing Risk
While it may be appealing in the short term to transfer your notes receivables, keeping financing in-house can lead to major business benefits. Not only can you yield higher margins, but you also retain more control over your reputation and compliance practices.
At the same time, you can’t deny that there are real risks to backing your own contracts, especially if you’re not operating at the same scale as corporate dealerships. When dealing with low credit buyers, the odds of delinquencies and even defaults are non-negligible.
But this raises another problem outside of non-payment– the possibility that a borrower might cancel their auto insurance before the vehicle is paid off. If something happens to the car when it’s uncovered, the lender could end up in a tricky spot.
That’s why insurance monitoring is an essential tool for dealers managing their own financing. While many businesses rely on additional interest letters to keep an eye on their customers’ coverage status, these notifications can take up to 60 days after a cancellation. During this time, a vehicle could be on the road uncovered, incurring major risk for the lender.
With automated insurance monitoring solutions, dealers can set up continuous monitoring to get timely alerts if a policy lapses. Not only does this reduce risk, but it also eliminates the administrative burden of sorting through notification letters.
Upgrade Your Business Protection with CheckMy Driver
Uninsured drivers aren’t the only risks that BHPH dealerships are facing today. Loan fraud, security breaches, and compliance violations also threaten to take a financial toll on businesses in the auto sector.
CheckMy Driver is a SOC-2 certified application with built-in ID authentication, insurance verification, and coverage monitoring capabilities. Set up some time with our team to learn how it can help improve efficiency and reduce risk for your business.