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The State of the Buy Here – Pay Here Industry

Posted 2:00 PM by

This article originally appeared in The Showroom.

It’s no secret that the buy here – pay here (BHPH) industry has faced challenges in recent years, whether it is increased competition from subprime and deep subprime lenders, changing regulatory requirements, or an increasing number of charge-offs. Though some of these challenges remain, there are still reasons for dealers to be optimistic. Here is the state of the industry and key takeaways from the 2019 National Independent Automobile Dealers Association (NIADA) │National Alliance of Buy Here, Pay Here Dealers (NABD) Convention & Expo.

Industry Trends and Outlook

Continued competition from traditional lending sources in the subprime and deep subprime space, including a growing share of lending from credit unions, resulted in overall flat sales volumes for BHPH operators during 2018. However, dealers were able to improve margins by maintaining consistent per-unit revenues and vehicle costs while reducing operating expenses. 

BHPH operators who focused on sound underwriting and deal structure, rather than chasing car sales, seemed to fare better over the prior year. While loan terms have continued to stretch and average amounts financed remained high in the subprime and deep subprime markets, BHPH dealers were generally more successful than other lenders in holding term length steady and obtaining higher customer down payments, which reduced average cash-in-deal and amounts financed to borrowers. Charge-offs declined slightly in 2018; while charge-offs are still high, some indicators appear to show that the worst may be in the past.   

Other indicators, such as rising new car prices – in addition to some expected easing of competition from traditional lending sources within the subprime financing market – are likely to present opportunities for BHPH dealers to regain market share in 2019 and 2020. However, dealers must be receptive to changes in consumer behaviors and utilize social media marketing and other emerging technologies to connect with potential customers amid declining foot traffic.    

Dealers’ need for capital remains ever present. Lenders are still lending; however, dealers should pay attention to their advance rates and leverage ratios. Advance rates of 40% to 50% should be an acceptable range for most dealers; advance rates over 50% would be considered highly leveraged. To achieve an appropriate amount of leverage and ensure sufficient future access to capital, dealers should pay close attention to cash flow management, minimizing overhead, and establishing a plan to retire debt.   

Growth of Technology and Data

Undoubtedly, technology and data are playing a larger role in today’s economic environment, as consumers rely more heavily on digital tools and platforms to inform and assist in their buying decisions. It will be imperative for dealers to embrace these tools in various facets of their business, whether it is in marketing and customer acquisition, inventory purchasing, process management, or maintaining digital documents. Innovation and technological advancements have created new opportunities for dealers to better examine their businesses, promote efficiencies, reduce operating costs, streamline inventory and sales processes, and bolster margins. However, privacy and compliance remain areas of concern with new technologies. 

Tax Reform Update

BHPH dealers are just now feeling the impact of the changes enacted by the Tax Cuts and Jobs Act (TCJA). During the NIADA│NABD Conference, KSM’s Kevin Sullivan discussed how tax reform impacted BHPH operators during 2018 and what they should do moving forward. Discussion centered on key provisions of the new law, including the 20% qualified business income (QBI) deduction, bonus depreciation, and individual exemptions and deductions affecting those with pass-through entities.

Accounting Standard Changes

There are three new accounting standard updates that will impact dealer financial statements that are prepared in accordance with Generally Accepted Accounting Principles (GAAP). These new standards relate to revenue recognition, accounting for leases, and assessment of credit losses. 

Beginning in the calendar year ending Dec. 31, 2019, private companies who recognize revenues from contracts with customers will be required to implement the new revenue recognition standard, which may change the way certain dealers recognize revenue in their financial statements. While there are several scope exceptions from this new guidance, operators will be required to utilize a five-step process to determine when identified performance obligations have been satisfied and thus when the associated revenue should be recognized.

For fiscal years beginning after Dec. 15, 2019, private companies will be required to record all leases on the balance sheet, regardless of whether they are currently classified as capital or off-balance sheet operating leases. Also, for fiscal years beginning after Dec. 15, 2020, dealers will be required to estimate the amount of current expected credit losses in their loan portfolio and book a corresponding provision for those expected losses. While implementation dates for the new lease and credit loss standards are subject to delays, dealers should consult with a professional in order to proactively plan for potential impacts on their financial statements.

About the Author
Bryan Burns is a manager with Katz, Sapper & Miller's Buy Here - Pay Here Services Group. Bryan works with clients to help ensure accurate financial reporting and verify that strong and efficient control structures are in place across their financial processes. Connect with him on LinkedIn.

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