Finance and Insurance - The Profit Center I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced. Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand. You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point. The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases. One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth. The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do. Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal. We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all. I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier. One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better. Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered. The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing. Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard. As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
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Ideas for Financing a New Embroidery Company Because the area of financing can be confusing, yet crucial to the success of any business endeavor, let's look at some do's and don'ts of financing as pertains to the embroidery industry. The "Do's and Don'ts" Do your homework. Do a market research study for your area. Do all of the work necessary to create a comprehensive business plan. Do decide which equipment best serves your needs to complete the business plan. Do spend about 1,500 hours preparing projections and proposals. Do contact every financial institution within a 2,000-mile radius. Do send up offerings to whichever heaven you prefer. Don't let the seemingly endless process deter you from your goal of owning your selected equipment. Don't take it personally when, after reviewing all of your thoughtfully prepared work, they hand you your hat and coat and boot you through the door. Don't take no for an answer! Welcome to the wonderful world of financing. Once you have decided on the type of embroidery equipment, the direction of your new venture and the location for your shop, then comes the how. The how is the money part. There are three ways to purchase equipment: Cash Finance Lease Even if you are in a position to pay cash, sometimes it's more prudent to hang onto as much cash as possible and finance anyway. This provides more back-up capital for the start-up period. What lenders are really looking for is as much stability as possible in a prospective loan customer. Here's another reason to consider holding back some cash: You may need an operating loan a few months down the road, and if everything. you have was already applied toward the machine, there won't be any cash reserve to reassure the bank. Unless the financial institution has a lot of experience dealing in the embroidery business, it will know nothing about re-sale values, and will discount your equipment's worth severely upon consideration for a loan. So, if you can't-or choose not to-pay cash, you still have two possibilities: finance or lease. These options also have their own advantages and disadvantages. Let's start with the advantages of financing. First, you own the equipment (or at least that portion of the equipment that the bank doesn't own.) You create an equity interest in the machine and therefore add to the asset column on your balance sheet. With each payment, that equity increases. You also create a liability on the balance sheet, but with each payment the liability decreases. At the end of a three- or four-year period, you own the equipment outright, so 100 percent of its value goes to the asset column. Naturally, there has been some depreciation on the equipment, but it rarely approaches its value at the end of the finance term. In our business, equipment maintains an extremely high value over the years. So do try to own the equipment whenever possible and practical. Another advantage of financing is that generally you can find lower interest rates from banks and credit unions than from leasing companies. In many cases, leasing companies borrow money from the same lending institutions that you might approach. In order for the leasing company to make money, it adds a percentage to the interest rate of the transaction. Even in cases where the leasing company is so large that it is using its own money, the interest rate is often about the same as that charged by smaller leasing companies. It is possible to shop around for more favorable interest rates on leases if you currently own a business, and have operated it for at least two years. If you have sterling business credit, you may be able to obtain a fairly good rate from a company that does its own funding, rather than one that brokers funds on your behalf. Some advantages of leasing are lower entry costs, tax benefits (ask your accountant), and the fact that it is sometimes easier to qualify for a lease program than to qualify for conventional financing for such a large amount. The disadvantages are higher interest rates and, sometimes higher payments. Also, at the end of the lease period, you don't automatically own the equipment. Let's look at these factors more in-depth. One of the biggest advantages of leasing is lower entry costs. Whereas a bank is typically looking for a 20% or 30% down payment, a leasing company is usually looking for the first and last payments, and maybe one additional month's payment as a security deposit. In some cases, a deal with which a leasing company is not comfortable can be strengthened by an additional capital deposit. For example, what if instead of providing first and last payments, plus an additional month's payment as security, you offer a security deposit equivalent to six monthly payments? Or maybe one year's payments? An easy way to provide such a security deposit is to post a certificate of deposit from your bank. If you have such an investment, you can pledge it to the leasing company as security on your lease, and still earn and receive the interest. The leasing company is covered, your security requirement is minimal, and you still receive the interest. One concern here is that in some cases, when pledging a large amount of money on a lease, the transaction becomes a purchase rather than a lease and may be treated differently from a tax standpoint. The primary reason that you would want the lease to be viewed by the IRS as a true lease, rather than a financed arrangement, is that monthly lease payments are deductible as a business expense. Loan payments are not deductible-only the interest paid each year is deductible. Of course, on an outright purchase, there are different tax benefits, such as investment tax credits. These can be significant, however they must be repaid when the equipment is sold because the sale results in a capital gain. This is a complex area, and each situation is different. Talk with your accountant about which avenue best suits your situation. If you don't have an accountant, consider consulting one on such major issues as this. At the end of the lease term, you have the option of turning the equipment back to the leasing company, or paying from $1 to 10 percent of the original cost of the equipment (or its fair market value) to purchase it. Be careful here, because if the purchase residual is too low, the IRS may look at the transaction as a financed arrangement or purchase, rather than as a lease. Another point to remember is that we are talking about leasing embroidery equipment-not automobiles or farm equipment. Some leasing companies specialize in certain types of business and know the resale value of equipment. You are going into business with every expectation of succeeding, but the bank or leasing company is looking at it from the viewpoint that if you should fail, it must limit its exposure on the downside. How much can it get for the machines if you can no longer make the payments? A leasing company that doesn't know embroidery equipment might assess a re-sale value on a machine at 10 cents on the dollar, whereas a company experienced in this business would use a valuation of 50 cents on the dollar. If your proposed equipment package includes digitizing equipment, you should ask about the prospective leasing company's policy regarding software. Most leasing companies place a limit on the dollar amount of software value in a deal. This varies widely, but software value is usually limited to between 20 and 50 percent of the total lease package. No matter what you do, make sure that you are well prepared when you approach a financial institution about a loan for your machine. Be sure you can confidently answer all questions. Those questions will undoubtedly include some of the following: Do you have a business plan? What experience do you have in owning a business? Why do you think your business will be successful? There must be some sort of general rule in the banking or leasing business that no matter how many documents the customer brings to a first and second meeting, a loan cannot be transacted until the customer has been to the office at least three times! Kidding aside, there is no alternative to being prepared, and it may take a lot of legwork to find the deal that works for you. Other sources that are emerging in the world of finance are government programs and the economic development council (EDC) programs. Do not overlook these possible sources of machine financing. Small Business Administration loans administered through the banks can be difficult to qualify for, but those who qualify are rewarded with low interest rates and favorable terms. There are other programs available in some areas from regional or municipal economic development councils that are referred to as Revolving loan Funds. Here's how they work: The borrower is required to provide from his own funds in the amount of 15 percent of the transaction total. The balance of the deal is split between the EDC and a participating bank. The bank usually loans its half at 2 percent over the prime interest rate, while the EDC provides its funds at 2 percent under prime. Here, you just may have the ultimate deal. Your down payment responsibility is only 15 percent, and you are borrowing at prime. (Donald Trump can't borrow at prime!) Terms are usually 4 or 5 years and there is no prepayment penalty for early payoff. Financing your own equipment may not be fun, but it is a necessary part of getting into the embroidery business. Be resourceful, and investigate all of the avenues available before jumping into a deal that might not be right for you. The long-term financial wellbeing of your new business is at stake. Take some time to find a arrangement that works best for you, so that the equipment you eventually buy will be a true pleasure to own.




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