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.
“Ananiyah” – Penyakit yang Paling Sukar Diubati.
How to Finance Your New Business
There are many creative ways to finance your business. Here are some common and creative ways to finance your business venture.
Family and Friends
1. Write a business proposal as if you were going to write one to obtain a loan from a banker. Discuss what the business does, the market demand for the product or service, how you intend to market your product or service, include financial projections: in what time frame do you anticipate the business will be making a profit. Include financial statements and tax returns.
2. State how much money you need, what the money will be used for and the terms of the loan such as the interest rate, how you intend to pay the loan back whether this be in a lump sum or in scheduled payments. You should also state whether the loan is secure, that in the event you are unable to pay the loan the lender will have a percentage of ownership in the business. In making your proposal more attractive to the lender you may consider having a promissory note or agreement stating the financial terms, scheduled payments and entitlement to the business in the event the note is not paid.
3. Don't forget the tax benefits in using a promissory note, if for some reason you are unable to repay the loan in full, the lender will be entitled to a tax deduction known as "bad debt". Warren Buffet who is now the second richest person in the world with an estimated net worth of 40Billion, raised $105,000 for his first business from 7 partners, two of which were his sister and aunt.
Equity in Exchange for Expertise
If you have a brilliant idea you maybe able to find others, who in exchange for there services are willing to accept some form of equity. This can be legal services, engineering services, or marketing services, the possibilities are endless. For example: many new start-ups require legal formation such as becoming a corporation. You can contact licensed attorneys in your area, who specialize in start-ups, many attorneys if the idea is one where the potential for future profits is great, will agree to postpone legal labor costs, and will request you only pay upfront costs, such as the filing fees. You can offer anywhere from 1-2%, for the postponement of legal fees and agree to pay the legal fees once funding has been obtained.
People are eager to be apart of the next big thing, in giving an attractive proposition with reasonable terms and conditions you can create winning business relationships allowing for your company to grow and become successful. Countless start-ups have utilized this financial strategy in launching their business. When Google was just an idea, Google's Larry Page and Sergey Brin, had convinced their landlord to take stock in their company in exchange for free rent.
Commercial Loans
In applying for a commercial loan there will be many paper requirements, which generally include your business plan, financial statements, credit report, incorporating documents and tax returns. A commercial bank will evaluate your business on the basis of the 5C's of credit:
1. Capital- how much of your own money do you have in the business
2. Character- your reputation in business, they will look at your credit score, credit history, such as making your payments on time, the amount owing to other creditors and if you have any judgments or liens.
3. Capacity- your business cash flow and the ability to repay the loan.
4. Collateral- assets you business owns such as equipment or real estate as security for the loan. Potential Guarantees that is someone else's ability to repay the loan if you don't.
5. Conditions- how do you intend to use the funds and for what purpose.
In applying for a commercial loan you want to investigate several lenders, as to what businesses they finance, compare interest rates and terms.
Small Business Administration Loans (SBA)
In the event you are unable to obtain a commercial loan you can apply for a SBA loan, as a requirement in applying for a SBA loan is you have to have sought out a loan from conventional lenders and were unable to obtain a loan at reasonable terms. The SBA guarantees 75% or up to $750,000 of the loan made by a private lender. As the business owner you must personally guarantee the loan and demonstrate your cash flows are sufficient to repay the loan.
Angel Investors and Venture Capital
Many start-ups have received Angel investment. Angel investors specialize in early stage financing. They are often more willing to invest in ideas where there is too much risk for a bank and not enough potential for a venture capital firm. They usually invest smaller amounts anywhere from $100,000 to 3Million and are willing to invest for the long haul- 5 years or more. Many times companies will start with an angel investment, in the event the company becomes a high net worth company and huge profits are easily foreseen a Venture capitalist is most likely to become involved.
Venture Capitalists specialize in high growth industries and rarely invest less than 5Million at a time, as they want the company to grow quickly, ideally having the company go public, so as to cash out in the shortest time possible usually 3-5 years. It can be extremely challenging obtaining venture capital, on average venture firms receive 1000's of business plans yearly and are highly unlikely to invest in a business that was not referred to them by an acquaintance. It is estimated that only 1 in 600 business plans received from Silicon Valley venture firms even get consideration let alone funding.
In order to increase your chances of funding, it is recommended you join business associations and business organizations that have the involvement of venture capital firms, this way you can network and make valuable contacts. In the meantime, while you are networking and getting your name out there, continue to build and refine your product or service making it better each and everyday. Don't be discouraged if your business plan is rejected, as this is very common and does not mean you do not have a great idea or business. Scott Cook, founder of Intuit with a 2Billion plus company which provides accounting software - Quicken and Quickbooks, was rejected by every venture firm in 1984, the venture firms said, most people don't have a computer let a lone require computer accounting software, therefore not a large enough market exists for us to invest in it.
Home Equity Lines of Credit
If you own a home with a substantial amount of equity you many want to consider obtaining an equity line of credit as they offer some of the best interest rates available. It is important to consider all the risks carefully, as you need to make monthly payments and do not want to lose your family home to launch your new venture.
Business Plan Competitions
Business plan competitions are a great source in obtaining capital to start your new venture when you don't have the connections to angel investors. Business plan competitions have become very popular in the last few years many universities and leading companies have business plan competitions. You submit your executive summary or business plan, and if selected usually pitch your business to a group of judges who will award funding to the best business ideas. Some competitions have restrictions where you have to be affiliated in someway.
The Stanford University business plan competition requires 50% of the team members be Stanford graduates, while others are open, such as the Rice University business plan competition, where they allow graduates from all parts of the globe to apply. In April 2009, the Rice University had 42 groups present their business ideas before a group of judged, 3 of which were awarded a payment of $125,000. For a list of business competitions visit: http://www.nytimes.com/interactive/2009/11/11/business/smallbusiness/Competitions-table.html.
Credit Cards
Credit cards can be a great source to quick cash. Many credit cards offer cash advances at very low interest rates for the first 6 months, which you can transfer after the low 6 months interest rate has ended. Usually credit cards can be a short term fix to a financial need, but they are not recommended for the long-term.
Clue Hut is a FREE service that allows you to create a profile that tells the world what you hope to accomplish and with whom you are seeking to connect with. You can upload pictures, video and files. Search other members profiles. Send Invites to members you are interested in knowing more about and receive invites from members who are interested in knowing more about you. Visit Clue Hut today!