#272 - Tips For Getting A Line Of Credit w/ Primalend

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. Luke, our friends at Promoland, Primal End, we have finally got the guys from Primal and we had to fly all the way to Vegas to corner these guys and get them to come talk to us because we want to know who, what they do for dealers.

Yeah. And so we got Paxton Wright, the managing partner at primaland, and we have Todd Yates, who is the director of business development.

Correct.

Yes.

Guys, give us just a quick, quick introduction yourselves, how long you've been with Primaland and what you do there.

Sure. I, I joined Primaland in 2015, so. Seems like such a long time ago. So about nine years with Primaland. And Todd, you were 2016, wasn't it?

That's right. So about seven and a half years. Yeah.

Yeah.

So what, what was your background in the auto industry before you, you started this pax and then we'll go to Utah.

I didn't have, you know, I got into the buy here, pay here space after the mortgage crisis in 2007, 2008, I went to work for Chris Leatham at Lidum Financial Services. Chris was in the process of setting up, you know, a lending group that really with, with LFS, you, the 20 groups, they had the conference, they felt like, look, we have all this data, we know all these dealers, we know the ones who are doing well, those who aren't. So he felt there was an opportunity there for us to start lending money to these dealers and help them grow their, grow their business. After the crisis, probably 2010, June of 2010, we sold that portfolio or I say Chris, I was not an owner of the company. Chris sold the business to Spartan Financial Partners. I went to work there for a number of years and then ended up actually going back to work with Chris as a 20 group moderator. So for me professionally, that was just a huge deal because I had lease here, pay here, 20 groups, buy here, pay here, 20 groups,. RFC, 20 groups. So it was a massive learning curve for me to really be exposed to the business in a way that I kind of knew the finance side and the capital market side. But to sit with dealers like yourselves every day and understand what's happening operationally was just eye opening for me. So. And it was 2015, a couple years after doing that with the lead EM group, if you remember, Chris sold the 20 group business to Niada. And so when that transition happened, I got to know Niada. Steve Jordan and the whole group very well. But for me it was just an opportunity because I felt like finance was home for me and I was going to go back into that at some point. I was going to have a major change one way or the other. So I took the opportunity then to dig deeper with Primeland and see if that was a fit. And it absolutely was and been there ever since.

And Todd, what's your background?

Before prior to primealand, I was. I worked for several companies in the, in the auto finance, mostly subprime auto finance, doing point of sale lending. I did bulk purchasing, set up people with lines of credit and at one point I started my own consulting firm trying to help people raise capital to do buy here, pay here, being all around the business, I knew that that was something a lot of people needed guidance on. And after referring a couple of deals to Primaland I got a call from Paxton actually. So joined the team and found my home.

And that's it. You can't do this business without capital. Either you gotta be, you gotta be wealthy to start with or you gotta hit the lottery or you have to grow it so slowly, which we've done for years. Even when you grow it slowly at times you still have to have capital. It's such a need for our industry. How do you focus on doing this for dealers and what can dealers do to make sure they are able to get a line? Because like you said, most dealers don't know what to do to start the process.

Sell cars, right? Yeah. How do I get financing? And they know they need it, right? We have these conversations. Often people learn about, I think I see to our team, often what we have to do is get people in the industry to understand that this is available to them, that they can get a line of credit because they're raising capital all kinds of other ways, right. They're selling their notes, they're payment streaming. And while they'd like to be able to continue to grow the business, capital constraints kind of force decisions on the business.

Yeah, I remember my dad, it was get as many notes as you can for six months, then sell the notes and then do it again. Well, you're just a rat in a cage.

Every conversation starts, right? Every conversation we have. And this is why Todd's so great at what he does is Todd's done line of credit, Todd's bought bulk purchasing portfolios. He's done point of sale and subprime lending and all of those kind of things. And every conversation we have starts not with kind of that mindset of business development Primal. And how do we get you in the fold? It really starts as a consultation, right? How are you financing your business today? Is it friends and family money? Is it sub debt that you've raised? Is it, you know, passing the hat at church or monks family like. Like, what are you doing to finance your business today? Are you selling receivables? Are you not selling receivables? Are you payment streaming? You know, all of these things are just part of a general understanding. Because once we understand how you're financing your business and what your goals are, then we can start talking about, well, is Prime Melinda fit there? Is there a cheaper way to do this? Is there a better, smarter way to do this? Because some dealers, they want to grow. Other dealers aren't really interested in growing. They just want to improve their bottom line. So it may be an entirely different strategy.

We were talking about this earlier, Jeff, about multiple locations. And you brought this up during your presentation today. That why, you know, why go to the next location without maximizing the location you're currently at? And Jeff said, yeah, because you may make less money with multiple locations. And who wants that headache?

Number one, that's very common, right? Most dealers, when they think of growth, they think of increasing sales and increasing opportunities. And I can do that better with another lot across town, right? And it's such a backfire kind of mentality because if you haven't maximized what your opportunity at your own store is, if you don't have the proper training, the proper processes, all of that in place, then you're just going to wind up creating more problems and being less profitable. When you look at. If we were to. If Todd and I showed you a Primerland underwriting sheet, right? We score all of our dealers and it's, you know, management background in history, it's, you know, years in the business, so on and so forth. One of those things that we, that we score on is how many dealership locations do you have? The highest score you can get is a five, and the lowest score you can get is a zero. If you have one location, that's a five. Because I know you're there, I know you're accountable, I know you're paying attention. I know that the dealer's there and on site and helping make business decisions every day. If you've got more than one location, that score drops to a three. And if you've got more than three locations, that score drops to a zero. Because most dealers are great at being a dealer, but not many of them are great at scaling their business in a way that is repeatable and profitable. And so we try to help with that.

We are not the best managers in the world. We are most of us now, I think this has changed a little bit the last 10 years. But we're good at selling cars. We're not good at making people be managers and training those managers and training our staff. You have to work hard at it. And you got to come to conventions like this and you have to do these things that make you better.

You got to listen to this podcast.

Podcast. You got to be better business people and dealers or car salesman at heart.

It's really unfortunate, Luke. The realities are there are very few businesses in the world where your primary focus, which is to buy inventory and sell inventory. That process alone can put you out of business and buy here, pay here. Because there's no obstruction to you selling more cars. You can just simply say yes, Right? So you're your own worst enemy. So what processes do you have? What procedures do you have? What underwriting are you doing? Are you verifying? Are you calling these verifications? I mean, all of those things make the difference between having a business that is repeatable, sustainable, and hopefully profitable versus a business that isn't. And it's just rare. I mean, most businesses, the more we sell, the more we win and buy here, pay here. The more you sell, oftentimes the more you lose.

Yeah, you can put yourself right out of business. That was really interesting about the primal end session that just happened here at convention. You guys, I didn't put together the pieces that a lender like yourselves are also professional. Buy here, pay here, consultants. Because you guys are talking about. You're in there talking about the basics one on one. What's your cash in deal and what's your collateral recovery rate? That's your spread. That's your return on investment. I don't think there's a lot of. I mean, even in all the 20 groups I've been in, nobody really just breaks it down to like, the basics of financial health. Like, I don't care about this, I don't care about that. I don't care about all this other stuff. Like, are you healthy and are you making money? And it was just really refreshing to be in your session where you guys are just like giving it to us in black and white. Do the math. This plus this equals this. Are you in business or are you going out of business? That's it.

Yeah, well, we, we say it probably to every dealer we talk to, right? And that is that, that if you're successful, then we're going to be successful. So we're committed to your success. Right? And that doesn't just mean providing capital, that means providing capital and understanding the numbers that we, that we analyze so that you can make changes in your business. There's so many decisions that are made every day that are driven by capital constraints, right. And if we can take that away, peel that away so that you can make the decisions that are best for your business, not just what's forced upon you by limited capital, then the business is going to thrive. So we see, not only do the businesses that we, that we work with do they grow a lot, but they tend to grow with healthier numbers as well.

So tell me this, guys say I'm a newish dealer and I'm at that point now where I feel like I've got my feet wet. I feel like I've got things kind of figured out and I am wanting to get off of my credit card and my family lines and my home equity loan and I'm trying to get a million, 2 million, 3 million to really take this thing and make it a real career, a real go at it. What advice would you give those dealers? Or what's kind of that first step in the process for someone who wants to become a full legitimate buy here, pay here and not just a kind of a tote the note or carry a loan every so often.

Call 1-800-PRIMAL END no, I'm joking. But yeah, but seriously, the, you know, the funny part of that is as we mentioned earlier, it just starts with that consultation, right? You're going to talk to Todd. Todd's going to evaluate the business, ask you all the appropriate questions to understand where you are in your stage of growth, where you are in your stage of understanding of how this can impact your business. And very, very key, and this can't be understated, is the quality of the data in your dms. If you're a dealer out there, you have to be on a very professional, audit controlled, high level dms so that as the relationship of lender to our customer, right. It, it's less about what we say to one another and far more about what the data says, right? We're gonna, we're gonna rely on that information and that's gonna drive a lot of the conversation with Todd. I mean I would say probably the.

First, the biggest challenge we have is understanding the data, making sure that it's entered properly.

Give me a specific, Todd, what when you go into these New Dealers, what DMSs are you seeing they should be using as opposed to these guys on QuickBooks, or are these guys like doing it out of an Excel spreadsheet? Or are these people just using like a second third rate, some sort of CRM that's not really meant for buy here, pay here, what would you recommend for them?

I think most of the people we talk to are using a reputable dms. There's just a thousand ways you could use a dms. There's different ways you can enter the data or you can get lazy about entering all of the data. Right. Understanding how you, how much you spend on a car, not just at the auction, but then afterwards to get it prepared for sale, that's important. And that's one of the things we're always digging through that data so that we can accurately understand, you know, your cost and deal you talked about in that, in that thing.

Right.

So we want to know what, what percentage of that loan you created was your car cost. And, and if we don't have accurate car cost data in the dms, if you're guessing at it, if you're just throwing a pack in because about 1500 bucks a car, that doesn't.

Right.

We really need to know those numbers. I would say the other thing that we spend a lot of time working on is understanding how do you manage charge offs? What do your losses really look like? Right. So when you charge off a car, you get a car back. Right. And how do you enter that back into inventory? What, what do you utilize to put, what numbers do you utilize to put the value back into that car? Right.

And are you using a book value or my best guess or, you know.

I was about to bring that up. What is it, what is the best practice when it comes to putting that, that car back in inventory? Now what we do at our dealership, and I don't know if this is best practice, I'm gonna just lay it out there. We use MMR 2.5 cr unless it's the car is destroyed and then we go down. I have a rule, if it, if it's a non runner, it's $300. If it's got a ton of body damage, we rank it down. What is for a dealer out there? What is the industry standard?

Pretty close. I mean something really key to understand as a lender. So every time we have a conversation with a dealer, it's like, well, that doesn't really work best for me because we have to compare apples to apples and oranges to oranges so we have to draw a line somewhere. So in our loan agreement, it's the lesser of the value you as a dealer determine the car is worth or some book. Some. Some book language. So generally speaking, this isn't true for every loan, but most loans are. We take nada mileage, adjusted average, wholesale. Right. And so that's kind of the peak. Can't be higher than that. But if, you know, the transmission is blown and you know that it's missing two fenders and so on and so on, then it's not that value. It's $400. And so, you know, Todd made a great point about the dmss, about how you use them. Right. You and I may have the exact same cell phone, but how you use your phone and how you store information in it and where you put, you know, here's where I do this and here's where I do. That can be very different. So part of his, you know, kind of main process early with a dealer is discovery of, okay, well, you're doing charge offs, but when are you doing charge offs? And is it at day 91? Or am I, you know, going 180 days, or am I putting them in a different account and, you know, and pursuing, you know, other. So. So there's all these nuances that we have to understand as your lender so that we can put together a proper loan agreement. Nothing we do. Nothing we do is cookie cutter. Everything is built on the. If we were to give you a loan and you alone, it'd be two completely different loans.

That's. It's so interesting that in this crazy business that we're in is nobody does anything the same way. Which is. Which is. Blows my mind. And that's the reason people get mad at me about talking about integration. Integration. Well, the reason we integrate with QuickBooks is because I want the same information going there all the time. And then we get to. We can play with it once it's in there, but for the most part, it goes in there one certain way, and then if we need to move it, we can. I mean, there. There are people that don't use QuickBooks.

And they put it all in a.

You've created a repeatable process for you and your business. But Jeff's repeatable process may be entirely different. So as your lender, that's where the conversation begins for Todd, is he's got to understand your business, not.

It must take 10 days to talk to a dealer to figure it all out, because it's done so differently.

Our life Cycle with a dealer in terms of. From first conversation to close, that can be three weeks, a month if it's. You know, they've had a senior lender before. They understand the space in the business. You know, we're going to be paying off a competitor or something, like somebody who just knows it and gets it. They got audited financial statements.

Boom, boom, boom.

Nothing they're hearing from us is some new idea or surprise versus some dealers. Many dealers that are here that are our customers today, you know, they talk to Todd. Todd educates themselves. Not really a candidate, but, yeah, I.

Don'T think we ever say no. We. We don't. We don't turn down a loan. Right. We tell them what we'd love to do a loan with you. Everyone approved. If you sound familiar, like, yeah, exactly. I guess I learned that from my turn.

Not your turn.

Yeah, exactly.

But eventually. Eventually, if you. If you do these things, we can. We. We can help you.

I want to know how many times Todd goes into a dealership, gets just deep enough that he's like, okay, I got to get out of here. Eject.

Ejac.

Like, pull the cord.

All y' all need to go to Mexico now, because you got to get out of the country if this is how you've been running this thing.

Well, the only time it has happened is when it's compliance related. Yeah, right. When it's. When it's related to, you know, the contracts or they're breaking the law, committing fraud. You know, thankfully, we've been at this long enough that those things, you know, as I say, we follow our nose, right? We go on site, and everybody's like, well, what's gonna happen? Well, it kind of depends, right? I'm asking you a series of questions, and based on your answers, I'm going to ask you a different series on it. Yeah, exactly. So. But it's just following your nose to understand the best practices of the industry. And, you know, a lot of that we've learned by attending events like this.

One thing that I've not even thought about because I've never had a big wholesale line of credit, so we've always had to run it kind of very tight. But if all of a sudden I had millions of dollars sitting out there, I'd go buy a couple Porsche GT3s and have fun, you know? I mean. I mean, what is the life cycle after someone gets the money who's never had it? I mean, it could. It could throw you off the rails real fast, right? How do y' all help A dealer not go through that problem.

So this isn't, you know, we say this because it's a fact, but it's also a great point. And I've heard, you know, Todd's heard me say it. I've heard Todd say it a hundred times. You know, our average customer in the first 12 months of a loan with Primalynn grows 187%. Okay? So portfolio growth, and what that means is his job gets really difficult because how does that impact collections? How does that impact your service shop? How does that impact all of these other things in your business? Everybody wants to grow, but nobody wants to think about all of the steps to proper mature growth. And that's the thing that, because we've seen it, we've seen all the pitfalls, we've seen all the mistakes. We've seen confusion of cash flow to profitability, which we just talked about in the class. So I can say, I mean, listen, it's hard for me to get an hour with Todd because he's constantly on the phone with dealers who are either in our portfolio and they're in their first 90 days, six months of going through that maturation process, or dealers who are trying to become part of our portfolio and the coaching and education, that's all part of it. I mean, it's just we take a very consultative approach to what we do.

We really try to guide them through that growth because we've seen the pitfalls, right? And we go back to it all the time. We talked about it during your last session. Service is one of those areas that people kind of overlook because it's going along, everything's going pretty, pretty well. You start selling twice as many cars a month. You got twice as many to recon, but you also have twice as many repos, and you got twice as many people on the street, right? So it comes at the service department in all directions. And we've seen this happen before. And we can help kind of warn people and help them prepare for it.

I've been in this situation where service can't keep up with sales. And then when you add, we sell 24s and 36s, when you add all that warranty work onto your shop, not to mention policy work, not to mention recon, compounding at one time, oh my goodness, it is a nightmare. And I mean, I've been in this while and I still don't have it figured out. I mean, what is the number one thing you can tell a dealer out there? How can we get prepared for that growth in the service portion. And if you're. I mean, it's the chicken before the egg. We don't know what's one of the things y' all recommend, One of the first things in the service department.

I mean, just literally just be prepared for it. Make sure you have the facilities. Reminds me of a really good story. A dealer we started, started about three or four years ago and had a lot that would hold about 100 cars, but had about 40 on that lot, right? But then once he had capital, he knew he could grow at that pace. He. He stocked up his. His lot with about 100 cars. He was selling twice as many. And I told him, you don't have a service department. You really got to start thinking about that. I kind of warned him about it. He said, I'm good. I've got. I've got mechanics in the area, all the business they can, they can, they can handle. They give me a nice rate. Right? Well, he put those guys at capacity in the first three months, right. And had to find new people. And, and this goes back to what we talked about. We look at these numbers. If he's entering his car cost numbers in every month, we see that number climbing month after month, month after month. He went from about an $800 average recon to about $1,600 average recon in less than a year. So you gotta ask the question, like, what. What's happening? Well, I had to find new guys. They're charging me full boat, right? And so his. His cost went way up. So the idea is that, that, you know, you use all the resources you can, but be prepared for that growth, right? Be prepared that right now you have to get, you know, 12 cars ready a week. It's going to be 24. What does that take? Right. It doubles down. You've got to put more lifts in. You've got to hire more mechanics. And there's, you know, the challenges exist anyway, even if you know what you're doing. Yeah.

You know, Todd and I have been at this together so long that, you know, we can kind of finish each other's sentences and thoughts. And, and when we hear a dealer, you know, with whatever the catchphrase may be, you know, we kind of look at each other because we know what that really means. And one of those, like, look at you moments is when the dealer says, oh, no, I've got strong relationships in town at a great rate. Because what that means is when you. When you. When you do get a line of credit and you are ready to grow, right? Well, if I own that other business, right, if I'm your great relationship that's there, you're turning the knob on their business. But what's worse is because you've negotiated this great strong rate, well, they've got a customer who's coming in that's at 150 an hour or you and your negotiated $95 an hour rate. Who's getting done first? The $150 hour rate guy. So you're not in control of your own business, you're not in control of your own capacity flow. It's just something that. Listen, when you're a small company and you don't want the headaches of a service shop and you don't want the headaches of managing that team, you don't want the headaches of ros and parts and all, we totally get it and understand it. But ultimately you got into Buy Here Pay Here because you want to be a master of your own domain. Right. You want to control the outcome both from origination through the sale collections and on the back end. And the only way you can do that properly in our eyes is by managing your own service shop.

100% agree with that.

What's the most predictable challenge you face?

Yeah, yeah.

You know, I think prominent still can help dealers buy their own location and stuff. How important is it to have your location? We talk about this all the time on the. To own your property. Is that something y' all look at? Is it something y' all want to see dealers doing?

I think that that is less important and less valuable today than it's ever been. Interesting. I don't, I don't think that the future of Buy Here Pay Here is in multimillion dollar, you know, brick and mortar locations. And our name on it, it's in a half a million dollar website. Right. It's about lead generation, capturing customers, controlling the digital market of your area. Much more so. I mean, we have very successful dealers that have no storefront at all.

That's right.

They're in indoor warehouse facilities that you could drive by it five times and never know that that's a car dealer. But they're driving all their traffic online. They're directing all their customers to certain location and they're coming there, you know, pre approved with, you know, steps have been cleared. They're basically there to pick up the car and take delivery. And so utilizing technology in a way that even just five years ago, forget about 10 or 20, but even five years ago, before pre Covid, the business was really a very High touch business. And there's a lot of successful dealers that have figured out, you know what, putting in all those hours and all that high touch is not necessarily required to be highly successful. So rethinking your business from that aspect, rethinking where you want to invest those dollars. Now, real estate's still a great investment. We provide real estate loans for dealerships. So to that extent, you know, we're happy to provide a loan for real estate for, for, for our customers. Exactly.

Listen, if you're operating out of a, out of a lot and you have an opportunity to, to buy it, which often happens kind of suddenly, right? And we're always struggling with cash flow, we can help you with or take advantage of that opportunity. Right? But like you said, we have people who. There's no need for the visibility of the street, Right. They drive all their business online and their rent factors half right. So they save so much money there, and they can still drive just as much traffic. It's just not necessary to have that street front.

And to all the guys that have been out there doing this 25 years, and so they're hearing this and thinking we're crazy. You know, get in contact with us. We'll put you in contact with some of these dealers to share ideas and kick around kind of new ways of thinking about the business and how we drive traffic to our stores.

I want to wrap this up with the interest rate question, right? Because we all like interest rates are going sky high. The business model doesn't work anymore. What worked before.

Listen, it is. It's a conversation we have constantly and every day. He's going to be more eloquent than me. But what I would say is that one of the first things I ask if people are asking me about, about our rate and rates are going up is what are they charging their customer? Right. So if the cost of capital is raising and you've got good credit, why aren't the cost. Why isn't the cost of capital going up for your customers as well? And if you're at your state maximum, then it is what it is. Right. But if you have the opportunity to take advantage of that, the whole country knows rates are higher, so why shouldn't yours be?

Yeah, I mean, if you can maintain proper deal structure, continue to make it affordable for, for the consumer, then raising your rates as a dealer is certainly one thing to consider in relation to primaland. As you heard me say in that room, we've got dealers all over the country. Every dealer we have can't Wait for true bank financing. That's the crown jewel. That's what everybody wants, and you should pursue that. But understanding the most common misconception is, and I think for dealers, it's, you know, a lot of times they don't understand the full scope of their financial statements. You know, the balance sheet or the income statement or whatever it may be. But when you see that interest expense line item to your lender, it's always one of the highest numbers, if not the highest number you're looking at. So you have a really high interest income coming in the door. And the cost of that is also a high interest expense. But the spread that you have between the two is great. A common misconception of a specialty lender like Prime Land or the competitors that are in our space is that, you know, if you have a conversation with Todd and Todd tells your interest rate is going to be 15%, a dealer thinks, well, man, I'm only charging my consumer 21. That's way too high. There's only 6% of spread. Not at all the case. Primaland is only going to advance you some percentage of the amount financed. Let's just say for round numbers that we're going to advance 50% of your amount financed. Right. You create a $10,000 contract, I advance you $5,000. That $5,000, I'm going to charge you 15% on. Yeah, but the $10,000 contract you have on the street, you're earning 21. So my 15 is only a net 7.5% of the 21 you're earning. So you still have a 13.5% positive spread in your interest. Right. Plus your down payment, plus your CRR minus CID spread that we talked about. So it's an extremely profitable business even at a high interest rate environment that we're in today.

And it should encourage dealers to operate as low leverage as they can get away with anyway. So we're offering you a 50% advance rate. Doesn't mean you have to pay, borrow 50%. Right. We're not mailing you a check. You have to request the funds. Right. We're going to make that credit available to you. So if you can, in any, you know, if you're, if you're worried about that expense, you can control that as a dealer.

Yeah, that's, that's a great place to stop because people don't think about it, you know, you just say, oh, it's 6%. When you actually do the math, it's a little different. And you don't have to take 50%.

Yeah.

And, and it's gonna, this is a, our business is a not a dangerous business. But I mean, you know, we can, we can lose money on loans fast. And so it's going to cost money to borrow, money to grow. And that's the reason we charge the rates.

We do. Yeah.

Yeah.

Absolutely. Guys, thank you so much. This has been so much for educational and anyone, obviously, in the show notes, reach out to Prime Lend if you have any questions, these guys are going to come out and talk to you and set you straight and ask you all the questions that you should have asked yourself years and years ago.

Yes.

Right. Thanks, guys.

Thank you, guys. Appreciate it.

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