Independent dealer financing is an often-overlooked capacity that can deliver higher revenues and profits for pre-owned car sellers, and it can be added to your independent dealership at little or no expense.
Independent Dealer Financing in the Current Market
Financing is an important element in most automobile transactions, with more than 85% of new car sales involving a loan. However, this practice is less common with used car deals for multiple reasons. Used cars at independent dealers generally carry lower price tags, and buyers are admittedly often less likely to be approved for financing.
Nonetheless, there is still a role for auto loans in the pre-owned car market, and a finance department can open the door to more sales for dealers. Despite this fact, 80% of the National Independent Automobile Dealers Association (NIADA) members lack a finance and insurance department.
Cost-to-market ratios for used car dealers are often above 90%, meaning a $10,000 sale should deliver a gross profit of $500 to $1,000. Keeping a car in inventory is estimated to cost $28 per day, so a vehicle sitting on the lot for 36 days longer than average can completely eliminate profitability on that unit.
Independent Dealer Financing and your Business
Narrow margins and turn times are very real concerns for dealers, and a strong F&I partner can provide solutions for both issues. F&I partners can open the door to independent dealer financing firms, which provide buying power and liquidity in multiple ways.
Floorplans are short term, secured loans that allow sellers to acquire inventory with minimal out-of-pocket cash flow. The vehicles are the floorplan loan collateral and the independent dealer usually only pays interest and some minimal fees which would be quite a bit less than the full cost to purchase inventory.
Floorplan loans create an incentive to turn inventory over quickly, but they also help to overcome the damaging effects of cash tied up on slower-turning units which can inhibit the ability of a small-scale dealer to reinvest in additional inventory.
Franchised dealers generally receive favorable terms from manufacturers on floorplans, but a fragmented market makes this service less straightforward for independent dealer financing. Services that connect smaller dealers to niche finance specialists can even that playing field.
Independent Dealer Financing and your Customers
The right F&I partners can also provide financing and insurance to consumers, thus allowing independent dealers to sell and deliver more vehicles. Adding this capability to your business can limit the impacts of sticker shock by negotiating the monthly payment instead of the total price and encourage buyers who would otherwise be priced out of your inventory. There is also an opportunity to drive higher revenues per transaction with less price negotiation and with recurring revenue from service and protection contracts.
These strategies are valid for smaller independent dealerships that are struggling with cash flow, or for opportunity-rich independent dealers that are interested in scaling up without a massive capital outlay. In either case, independent dealer financing, when utilized responsibly, will improve profitability and reduce the associated risks for dealers.
Dealers without F&I departments should consider partners like Vantage Finance that provide outsourced independent dealer financing services.
