What Happens After The Pandemic? Opportunity!

By: Kenneth Shilson
President, Subprime Analytics (www.subanalytics.com)

With vaccines for COVID-19 now being distributed, subprime auto finance operators believe the end of the pandemic is near.  When the pandemic does end, operators must focus on regaining loss market share to recover.  The good news is that the market environment to do that should be exceptional for those positioned to capitalize on the opportunities.  This article will focus on ways subprime operators can prosper after the pandemic!

If you are looking for a roadmap for post pandemic success, you may already have it if you have been in the subprime auto finance business for a few years.  That’s right; it is locked up inside your dealer management software database!  However, you need to unlock it by data mining the things that are working well and those that aren’t working at all!  This process starts by computing important portfolio metrics like static pool, loss to liquidation, CRR and default rates.  If you don’t have credible portfolio metrics or if you don’t know how to interpret them, I can help with both.  However, metrics alone are just numbers so you must get “inside these metrics” to identify success factors and the things to avoid.  Trial and error mistakes cost millions of dollar$ and the availability of capital will be limited until the pandemic is in the rearview mirror.

Fortunately, data mining technology exists which allows you to drill down inside the metrics and get the answers you are looking for.  At Subprime Analytics, we focus on customer attributes like customer financial Capacity, Ability to pay, Stability and credit History.  If you believe in acronyms, that spells CASH!  I have found that when you identify these attributes and use them in underwriting, that is exactly what they produce!

Subprime operators know that the vehicles they sell are vital to success.  Good underwriting involves matching each customer with a vehicle they can afford and one which will perform during the entire life of the contract.  Therefore, it is important to identify which vehicles perform best in your market and which don’t.  What mileage at origination is your sweet spot?  What vintage vehicles work best and which ones have higher default rates?  How do your recycled repos perform?  How much reconditioning should you spend?  These answers are stored inside your database if you can mine and interpret them!  At Subprime Analytics, I have data mined over $23 billion dollars of this type information and learned that you need these answers to make better, more informed underwriting decisions.

If you identify the best customers and provide a properly matched vehicle during underwriting, you still must structure each deal properly.  You need to determine what contract terms are too long.   How much downpayment is needed to minimize your cash in deal and risk?  What customer repayments can they afford?  How much repayment do you need to cover your increased operating and vehicle costs?  These answers are also inside your database if you access them!

Finally, subprime auto finance is a very capital intensive business.  The capital you need must come from both internal cash flow and external borrowing.  Operators frequently rely too heavily on external borrowing for the capital they need and fail to maximize internal cash flow by utilizing a cash efficient business model.  Your business model may look profitable in your financial statements but be inefficient from a cash flow standpoint!  Have you determined if your business model is too capital intensive?  As for external borrowings, “if you borrowed your way into the pandemic, don’t expect to borrow your way out of it!”  Your portfolio metrics, your cash management skills and the equity in your business will dictate whether external capital will be available to fund your growth.

Subprime sales originations must convert into cash to make any real difference!  In other words, “keeping them sold” is more important than the initial sales.  Good underwriting which properly matches “qualified customers” with the vehicles they can afford over a reasonable contract term is needed to keep portfolio growth performing.  Underwriting best practices should be developed by drilling into your historical underwriting database to identify what works best and what doesn’t (at Subprime Analytics we do this electronically using a data extract from your DMS provider).  Once you identify the attributes that are working best, incorporate them into your underwriting procedures and your credit scoring system (if you have one).  You should identify and promptly eliminate those attributes that are not producing positive results because they exhaust valuable capital that you will need to complete the recovery.  Data mining is the most efficient and cost effective way to analyze your portfolio performance data.

If you are new to the subprime auto finance business and don’t have historical data to mine for answers, I can help!  Annually, in connection with NIADA we publish comprehensive industry data and a benchmark report which you can use as a reference to identify the data you will need.  Make sure you begin to capture these things in your DMS system.  You can also utilize my database information to help develop or “tune up” your business model.

In summary, you can find the roadmap to future success by “looking under the hood of your own portfolio”.  Opportunities to succeed in the post pandemic market will be exceptional!  Now is the best time to formulate your plan to capitalize on the opportunities ahead.  Good luck!

Kenneth Shilson is President and Founder of NABD and Subprime Analytics which provides computerized portfolio analysis for operators and capital providers in the subprime auto finance industry.  Visit our website at www.subanalytics.com or call Ken at 281-723-9508.  Our services are designed to help you increase capital and to identify more profitable operating practices.