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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Yes, You Can Still Finance Your Franchise Purchase Got turned down by your bank for a franchise purchase loan? Know that you are not alone. Or, are you afraid that you will get turned down for that loan? Sure, it is a common fear these days as getting a business loan or franchise loan can be very frustrating. But, with a little knowledge on your side you can alleviate that fear and start charging forward in your franchise purchase as you will never get anywhere unless you start moving forward and moving forward right now. Keep this in mind: All business lending dropped off after the financial crisis in 2008 including Small Business Administration (SBA) lending. Yet, over the last few years, while bank lending still remained stagnate, the SBA had some banner years in regards to the number and amount of small business loans they backed - no where near what they were doing prior to 2008, but they have had some good lending years recently. And, on top of that, according to the Wall Street Journal: "About 10% of all SBA loans go to franchisees, with the size running between $250,000 and $500,000, and maximum of $2 million." So, if they can do it - these 10% - then so can you. You just have to start with the following 3 key issues in mind: 3 Key Issues To Improve Your Chances of Financing Your Franchise Purchase While there is a great deal of individual items that go into getting a franchise loan approved, the following three items are the foundation on which all those other requirements (and ultimately your approval) will be based on. Get these three things right in the beginning and you improve your chances of getting that needed financing by ten fold: 1) Credit Matters. Your personal credit matters. Any lender - be it for a franchise loan or be it for a personal home loan - will pull your personal credit report and the personal credit report of anyone whose name is on the credit application (or that is on your franchise purchase agreement). And, if you have problems here - meaning that your credit score and credit history is not in the stratosphere - then you need to get that fixed before applying. And, the good news is that it is not all that hard to do. Simply pull your credit report and see where you have problems. First - make sure you are paying your current bills on time and as agreed. If you are late on any of them or have been late - then catch them up right away. If you are not willing to do even this most simplest of tasks - then why would a lender be willing to lend you a large chunk of money that they may never get back? Second, according to Bankrate.com; your credit limits and your balances are key in improving your score. "One of the major factors in your credit score: how much revolving credit you have versus how much you're actually using. The smaller that percentage is, the better it is for your credit rating." And, lastly, according to myFICO.com; "Don't close unused credit cards as a short-term strategy to raise your score. And, don't open a number of new credit cards that you don't need, just to increase your available credit." Bottom line is that you should only have the credit you need and then manage that credit as you are expected too - and you will never have to worry about your credit score again. 2) Down Payment. No matter what type of loan you are seeking from a bank or other business lender, all will require that you have some "skin in the game" as they say - a sharing of the risk. This means that you have to put your own money down to get your loan approved. The lender thinks that if you put some of your own money down, you will work harder to ensure that you don't lose that money and the only way to ensure that is to continue to make loan payments to the lender - no matter what. So, the question becomes how much down? According to Bernie Siegel, founder of Siegel Capital LLC and a broker of small business loans; Prior to the financial crisis, "the range was typically 10% to 30% of the franchise start-up costs, with 20% being the most common figure. In the present atmosphere [however], we have seen some lenders move from 15% to 25%." That is a lot of money for a down payment. For a $250,000 loan, your down payment would range from $37,500 to $62,500. Or, for a $1 million loan, you would have to come up with some $150,000 to $250,000 in cash out of your own pocket to get your loan. While this is not an easy concept to digest, know that this is the way it is. So, quit worrying about it and look to find ways to raise that kind of capital - without your down payment, you cannot move forward. 3) Collateral. Lastly, collateral. All lenders these days are afraid of not getting repaid and facing again the scrutiny they did during the economic meltdown of just a few years ago - so they are doing more things to make sure that they are 1) approving better loans from their prospective and 2) making it harder for borrowers to get those loans - thus those that persist enough to actually get approved and usually the ones that pay. So, like requiring a down payment, lenders also require that you put up enough collateral to cover the loan's principal. And, the amount of collateral is rising each year. When asked about how much collateral is needed these days, BusinessMart.com, claims that; "Collateral requirements were previously around 40% of the franchise costs. However, now that amount is closer to 100%." This means you will have to come up with some form of collateral - business or personal - to cover the entire amount requested. Hopefully, your franchise will include property and equipment that will cover the majority of the collateral requirement - but, if not, you may have to put up your personal home, your personal vehicles, your personal stocks and retirement accounts and so on. But, in the eyes of a franchise lender, if you are not willing to take a risk on yourself, then they are not willing to take a risk on you either. Conclusion Now, having said all that, know that franchise lenders are in the business of lending money and if they do not lend money they will go out of business. So, they do want to lend. And, most all business lenders love franchise businesses as they have solid business models, great name recognition and a huge network of knowledgeable persons willing (either on their own or because they have a monetary reason to do so) to help you and your franchise succeed. But, they also have been burnt too many times and, in combination with this poor economy, are being extremely cautious - as putting out bad loans will also force them out of business. However, if you have your loan foundation in place - your credit, your cash and your collateral - in place, then you have already surpassed any lender's initial screening process which should get you that one needed chance to sell yourself and your franchise to get your loan approved. Can't really ask for more than that. Capital LookUp - seeks to make your capital raising efforts easy. On our site, you can search for a myriad of different business loan products from financial institutions and business lenders in your local area, in your region, in your state or nationwide. We seek to simply make your capital raising process an easy and productive venture - allowing you to quickly get back to focusing on what you do best, growing your business.




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