Is your dealership kicking around the idea of ramping up your special finance business? Has all the buzz about opportunities in the subprime or non-prime segment got you curious? If youre not at least exploring the possibilities of special finance at your dealership, then you may be punting potential profits into the hands of the competition.

Whether youre already dabbling in subprime sales and want to improve your efforts, or youre looking for help entering this lucrative, yet sometimes risky business, the information that follows just might help you make some key decisions.

A quick look at the trends

A lot of dealers believe that success in subprime sales is a thing of the past. Others contend that special finance is simply not for them-they dont want their good reputation tarnished, or they think that the risks are more than they can bear. But here are a few facts that may change your outlook:

The pool of subprime consumers is expanding.

Consumer debt has increased 12.5 percent between February 2004 and February 2006. Personal bankruptcies increased over 31 percent between 2004 and 2005. Some reports show that 40 percent or more of the borrowing population have some sort of credit impairment. (Sources: Experian, National Automotive Finance Association.)

People will always need reliable transportation.

No matter what their credit score, people need a car to drive. Even as consumer debt and late payments are on the rise, delinquencies and losses on car loan defaults have gone down. Between 2005 and 2006, auto dealers saw an increase in portfolio dollars and number of accounts contributed by special finance customers. (Source: NAFs 2006 Non-Prime Automotive Financing Survey conducted by Benchmark Consulting International.)

Its growing more challenging to sell higher-priced new vehicles.

Competition is up, the economy is volatile, and margins are shrinking on most new cars. Used units make up about 90 percent of the subprime business. An inventory of quality used vehicles can deliver higher margins, especially through special finance deals. Dealers who offer lower-priced new makes, like Suzuki and Kia, are also primed for the subprime dollar.

Theres a lender for almost every auto shopper out there.

If you dont have deep pockets to do your own financing, youll need to look to lenders to fund your special finance (fi) loans. The good news is that there are plenty of lenders out there who want your contracts.

In light of these and other trends, subprime auto finance is expected to grow substantially in coming years. And theres still plenty of room for more dealers to enter the market. Some estimates show that as few as 3,000 of the 23,500 franchise stores view special fi as a serious segment of their automotive business. Plus, new tools and technology are making it easier than ever to get your foot in the door.

Whats my profit and risk potential?

This is the question at the top of every dealers mind. A lot of dealers have given special fi a half-hearted try, but jumped ship in a hurry. They werent ready to commit.

Youre either in or youre not, says Scott Falcone, dealer principal at the Bob Watson Group in Chicago. Theres no just sticking your toes in the water. You have to be all in, or youll wind up with money on the street that youll never see.

Some of the more committed dealers have gone on to double their gross profit per unit. Theyve learned what it takes to do special finance the right way.

The Bob Watson Group is a good example of a dealership that has dedicated the resources and the time required to make their special finance business a huge success. In fact, they just opened their fourth store in September. How have they done it?

It starts with the best and the brightest people, says Falcone. You need ironclad processes. You need inventory. You need marketing-and you need to be capitalized. Without those things, youre going nowhere. Falcone says that going forward he expects a minimum of their sales at any one store to be 30 percent. At our flagship Chevy store, we are about 70 percent subprime. Generally, we think well run a 50/50 mix or more, leaning towards subprime, no matter where we open our future stores.

Another industry success story is J.D. Byrider, the leading used car and finance company franchise that specializes in credit-challenged car buyers. Although the J.D. Byrider business model differs from the typical dealership, Byriders best practices in subprime sales and service can serve as food for thought for any dealer thinking about special finance.

We have tackled this business differently than some of the other solely subprime finance companies, says Steve Wedding, CFO of J.D. Byrider. Were integrated from top to bottom. We buy the car, we repair the car prior to the sale, we sell it, and include a warranty. We go through an underwriting process to ensure we set up terms that the customer can afford. And then we work with that customer throughout the life of the loan.

Today, J.D. Byrider operates 124 dealerships across the nation, owned by either franchisees or the company. Forty to fifty percent of Byriders franchisees are new car dealers operating stand-alone Byrider-branded stores in areas near their own dealership-branded stores.

Because of the difficulties new car dealers are having, particularly the domestic new car dealers-margins are tough, demand for their product is tough-we have an avenue for them to deliver products to customers who are probably in their market, says Wedding. The subprime customer is everywhere.

What do I need to know about the subprime customer?

Generally speaking, the term subprime is applied to consumers with credit scores in the low 500s to the upper 600s. Youll find that many of your subprime customers were, at one time, prime customers who have experienced a rough patch because of a divorce, job layoff, extended military service, a past bankruptcy, health issue, or other reason.

There are a lot of good people, who unfortunately have had bad things happen to them and are looking for somebody to give them another opportunity, says Dan Knoblock, dealer principal at Legacy Auto Group in Syracuse, New York. Sometimes dealership employees feel like they are being bothered by these customers, when in reality [these customers] could mean tremendous growth for their business. He emphasizes that special finance customers are very loyal. If a dealer will work with them, youll see them back in two years for their next vehicle, when theyre taking a step up.

The credit-challenged consumer is not necessarily picky, because most of them are already aware that they cant be. They know they have to find a vehicle that meets loan qualifications.

For the secondary customer, its more about the loan and less about the car, says Travis Weisleder, CEO of Interactive Financial Marketing Group, a special finance lead generator and full-service online marketing firm. He says that from a dealership standpoint you work the lead backwards, meaning that you discuss financing first and then go find the cars that fit the customers financial situation. The prime customer knows what they want and if they can roughly afford it. The subprime customer would like to get the new 07 Toyota Camry, but hes a 540 credit score, makes $2,000 a month, and needs a car to get to work&hellip-hes not going to get what he has his heart set on, hes going to get what fits his budget.

But just because a customer has questionable credit doesnt mean he wont shop around to find a loan/vehicle package that is acceptable to him.

Too many times at different dealerships, customers can be bullied into a certain vehicle, says Knoblock. He says that having a good selection of the right vehicles in stock is extremely important if you want to satisfy your customers and see your subprime program work. We dont just carry one or two, and we dont carry a hundred, but we try to grab 15 to 20 different vehicles, whether they be in the minivan segment, SUV, cars, trucks&hellip-so were able to let the customer select a vehicle they like.

How do I get special finance leads?

Until recently, the majority of subprime leads were generated through direct mail campaigns or by promoting 800 vanity numbers through TV, radio, newspaper, and billboards. Today, the Internet has changed all that. While traditional advertising methods can still be very effective for subprime sales, dealers who shift at least a portion of their marketing budget to Internet leads can significantly lower their upfront lead acquisition costs.

Internet leads are in demand because theres no risk to the dealer, says Rory Holland, executive VP of blueSky Marketing, a provider of special finance leads, Web-based CRM tools, direct marketing, and other dealer services. The dealers buying the leads and paying for them as they receive them. They can book the revenue for vehicles sold before they even have to pay for the leads.

Knoblock, who buys blueSky Marketing leads and uses their Web-based CRM program to manage those leads, says that Legacy Auto Group has shifted the majority of special finance marketing dollars to Internet. What we do is target every month a certain amount of leads. For example, if we set the budget at 500 leads this month, we try to deliver between 10 and 15 percent of those leads or 50 to 75 special finance deals a month. He says that right now Legacy gets about 35 to 40 percent of its overall business from special finance deals. Were looking five years down the road and saying that our business will pretty much consist of about 60 percent credit-challenged individuals.

The Bob Watson Group also relies on Internet leads for a large portion of their in-market prospects. We look initially for a good cost per lead, says Falcone. Then we go back and evaluate our ROI based on our cost per sale. We may pay less for a lead from someone but sell no cars. We may pay double for a lead from someone else but if our cost per sale is in line and our ROI is good, then we continue to work with that vendor.

One of the vendors that the Bob Watson Group continues to turn to for quality leads is CarsDirect.com. CarsDirect.com operates Websites that cater to both prime and subprime auto shoppers and is also the nations largest special finance lead provider.

What we sell to a dealer is a five-line credit app that is a lead&hellip-employment information, monthly income information, social security number&hellip-its enough for the dealer to make some sort of judgment, before even talking to the customer, as to whether this is going to be someone theyre willing to work with, says Josh Evans, VP of dealer relations with CarsDirect.com. The Internet has actually opened up special finance to a lot more dealers.

Regardless of what advertising and marketing methods you choose to generate special finance leads, take note of these tips from the experts:

• Consider branding yourself differently for your special finance customers. Start with a vanity Website and phone number.
• Be sure your message mentions that you offer a selection of financing options to meet all credit situations.
• Make sure you only take on the number of leads your staff can work. Just as with new car leads, if you take on more subprime leads than you can handle, your conversion and ROI will suffer.
• Dont throw away leads- you may be able to use them later.
• Give your marketing some time to work. Take a 90-day snapshot, rather than reacting to a 30-day cycle.

What additional infrastructure is required?

Holland of blueSky asserts that dealers tend to fail because they believe they can apply the same processes and personnel to special finance as they do to new car sales.

The first thing we ask dealers who want to get involved in special finance is do you have dedicated personnel? For special finance to work you cant take your existing personnel that might be handling new car leads and say, Hey, by the way, were going to start buying subprime leads.

Legacy Auto Group has a dedicated BDC coordinator who does nothing but set up appointments. They get on the phone and set up an appointment with the customer, reiterate and confirm the appointment, and let them know everything theyre going to need to bring, says Knoblock. We let them know theyll be there for at least a couple of hours. And we allow the customer to tell us their story.

For the dealer who doesnt have all the resources in-house, there are numerous vendors out there that specialize in providing products and services for your special finance program.

We work with our dealer to create a customized marketing plan based on the needs and goals of their individual store, says Weisleder of Interactive Financial. We have our own finance company. We have our own BDC. We have our own CRM that manages the lead lifecycle. We also run a direct mail print shop. By having all of those pieces here, the dealer is able to pick and choose what they want and customize any program based on where they have gaps in their program or process or to best achieve their goal of selling more cars.

When it comes to having effective tools, many dealers consider desking software a must-have for maximizing profit on each deal. ProMax Online^TM, created by Dealer Marketing Services, Inc., is one of the most comprehensive Web-based front-end management systems on the market today.

Dealers are probably missing eight to 10 deals just from people walking into the store, by not having the right lenders or the wrong type of inventory, says Rob Pearson, ProMax Onlines vice president of sales and licensing. He says that Promax Online calculates every potential combination of vehicle and lender and then sorts the result by profit. Lender guidelines, credit criteria&hellip-everything goes into one system. In addition to having the right tools, Pearson stresses that training your staff in special finance is also key. We help dealers set up departments and we train them through our seminars, or help the existing manager put the program in place.

Promax Online recently put its own special finance program in place at its very own brand new Suzuki dealership. Our new Promax headquarters that opened in May has an actual 14,000 square foot single point Suzuki store in the lobby, says Pearson. Our average is over 100 special finance deals a month. We did a million dollars in our first 100 days of subprime. And well have three other stores open within 60 days. He says that the reason Promax initially wanted to have a car dealership was because it was the perfect laboratory to test their software. It then developed into a revenue source and its great for training because people come here and can actually see our product in action &hellip- from A to Z.

For dealers who still arent sure if special finance is right for them, Promax offers a 60-day trial on a customized system for dealers to try out subprime before fully committing.

What do I need to know about lenders?

These days, established national subprime lenders and automotive finance companies are plentiful. The ideal lenders for your dealership and the best number to work with will be based on a number of factors, including geography, your relationship with a specific lender, and volume of sales.

The dealer whos going to be good at special finance needs to have relationships with a lot of banks if they want to do high volume special finance sales, says CarsDirect.coms Evans. You just never know what customers will be bought at what bank. Your most aggressive bank out there may not touch your customer with a 10-foot pole, but some other bank will.

Knoblock says that everything is based on relationships and emphasizes that nurturing those relationships over the long-term is key.

It takes one person who knows the lenders requirements inside and out, says Knoblock. Requirements can change so quickly today. You could have a relationship with a lender that youve done 20 contracts with and then all of a sudden, theyve made a decision to change something and theyre buying three or four contracts. He says that you have to pay close attention to which lender is doing what, and understand how a persons credit history may or may not fit with a particular bank.

When it comes to working with new lenders, Falcone of Bob Watson cautions dealers not to rush into anything. When new lenders pop up out there, we often will sit on the sidelines for a few months and watch, says Falcone. I dont want to have 10 or 20 contracts on the street and then all of a sudden have a problem being funded. So were a little less aggressive when it comes to putting new lenders on board because we do believe its a relationship business. We value the relationship with our lenders.

Theres no doubt that solid relationships with lenders are a top priority for any special finance department. Having the right inventory, acquiring quality leads, and working with the right tools are also critical to success. But before focusing on these aspects of the special fi business, dealers must understand the real needs of the special finance customer so they can learn to adapt their internal processes and train their people accordingly.