Cooke’s Report

The credit crunch: Quality will show through

‘Quality will show through’ is an adage as old as business
itself – and the current credit crisis is no exception. In the case
of motor finance there are a number of issues perhaps worth
dealership management examining in more detail. Two issues
immediately spring to mind – one associated with credit supply and
the other with credit demand whether for new or used cars and light
commercials.

Fist, consider how credit supply for vehicle acquisition is
changing and the role of dealership management in protecting credit
availability for its current and future clients. Essentially
external motor finance comes from one of three sources:

OEM captive finance: currently being promoted very heavily
through their captive finance houses at either very aggressive,
often zero rate, or associated with other special deals. This money
is focused principally on selling new cars. Yes, the dealer gets a
commission on the deal and it is relatively easy to manage – but it
is finance focusing principally on new cars. Over-reliance might,
just might lead to longer term concerns if lending criteria are
changed or made tighter

• Bank finance: many prospects walk into dealerships and say “I
  have the funds arranged” – that could mean they have a scrappy
  piece of paper that has come through the post or been torn out of
  the press or picked up while in a financial establishment. While
  the salesperson’s heart might sink – another wasted finance
  commission opportunity – the real response should almost be a
  reflex reaction – offer to provide a quote for point of sale
  finance. There is little, if any, certainty that the external
  credit offered is the best available or the most suitable for the
  individual or their dream purchase
• Point of sale finance; the third and too-often ignored source
  of finance, particularly in times of credit shortage. The well
  ordered dealership may well have two or three sources of point of
  sale to which they can present client requests, if the first does
  not accept the risk. As such, there is not only commission on the
  finance deal but a vehicle is sold as well.

Statements of the obvious? Yes. But realistically how many
dealers overhaul their motor financing structure on a regular basis
not only to ensure a healthy proportion of units are being funded
but to ensure that all routes to finance are alive and well – and
being used? Excess reliance on one route to finance may make the
finance task less demanding in the short term but, if that source
changes its rules, or changes its focus, a dealership could have
real problems both for new cars, but, more particularly, for used
vehicles.

Lingering effects

Remember some of the industry’s sages are predicting it could be
a couple of years before the crunch has flushed completely through
the system. Better to have a multi-source finance strategy in place
than wait until the market changes and you need to scrabble
around.

What about the demand side of the equation? How might the credit
crunch bite there?

Certainly short term economic uncertainty, government’s second
thoughts and self inflicted tax chaos would appear to be adding
further uncertainty to an already fragile situation. Such
uncertainty will assuredly impact on car sales whether shorter or
longer term.

Almost the first contact with a prospective buyer should
establish their financial viability to acquire the vehicle and
offer them the opportunity of a point of sale finance, whether they
have bank finance in place or not. It is perhaps more difficult
with OEMs’ captive finance offers but the rest is fair game and
open season.

Equally importantly, the credit crunch could offer the
opportunity for additional dealer-directed finance deals. A
proportion of prospects may well have not thought through their
finance options and sources. For the forward-planning dealer this
may well be a genuine longer term opportunity. Assist with the
quality prospects in arranging finance – and look to those clients
to come back again. 

‘Quality’ in terms of your finance sources and in terms of
customers put forward for motor finance deals may be an issue ‘we
will handle tomorrow’, but is delay creating an unnecessary risk –
and wasting a profit opportunity?

Peter Cooke, KPMG Professor of Automotive Management,
University of Buckingham

Motor Finance Issue: 43 – May 08
Published for the web: May 27 08 11:32
Last Updated: May 27 08 11: