#318 - Lines Of Credit - The Ultimate Guide

This is the Independent Dealer Podcast, education by Dealers for Dealers. Now here are your hosts, Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. So, Luke, I did some research and I actually found out the leading cause of ed.

I don't even want to go down. I don't even want to go down that rabbit hole there.

And when I say ed, Luke, of course I'm referring to extinct dealership.

Oh, okay.

Much, much better.

I don't know what you guys were thinking, but do you know what the number one cause of extinct dealership is?

No cash. Probably. And yeah, that. Probably it.

Bad debt structure. Yeah, right. Not having, not having cash, not having inventory, not having good terms. Right.

So, yeah, big, big, big problem.

It is, it is a big problem. Number one, damage to relationships. So we brought in the ED experts. I know a couple guys that are experts in preventing ED. Mr. Chad and J.P. gentlemen, thanks for joining us.

Thanks for having us.

Great to be here.

Thanks.

So, Jeff, these guys know how to dissect buy here, pay here stores and, and tell us what we're doing right and what we're doing wrong. And today we're going to talk about lines of credit, I think. Right, Jeff?

Yeah. So this episode, guys, we're going to go through as much as we can in some pretty decent detail. It's a huge topic. But this is going to our definitive guide to lines of credit. It's a question we get asked all the time in the forums, in groups, by email, all different types. Right. We've got buy here, pay here guys, but we've also got retail guys. So we're going to talk about flooring lines and things like that. So, gentlemen, jp, Chad, start us off real quick. Everyone listening is familiar with you. They know who you are. You know, we'll talk about that a little bit more, but give us a quick overview of the different types of lines of credit that you're seeing dealers take advantage of. Like, what are the kind of. The three basic categories? And let's dive into each one.

Go ahead, jp.

Yeah, I mean, you know, the most common one in the space, the receivables line of credit, right. Against your portfolio. And the portfolio is your retail installment or lease agreement is, is your collateral. Right. That you borrow against. And a borrowing base monitors it. Right. You've got flooring lines secured by inventory. Everybody's familiar with that. And then of course, like a real estate line of credit, you know, think a heloc or it could be a traditional Mortgage, but also could be a line of credit on your, on your building or your home or an investment property, something like that.

So.

And then we probably also have some of those hard money from friends or, you know, investment from, from other sources.

Right, JP Absolutely, man. Exhaust all possibilities. Like the, the most affordable capital you can get, as long as there's an understanding between the parties, is, is the best. Right? So if that's a, that's mom or if that's a cousin, fantastic.

Well, let's, let's talk about how the source is here in a minute. But, but the needs the dealers have, and I want to put those in rank, right, because those are ranked in, in desirability and by both the dealer and the bank. Right. I mean, real estate is kind of the, that's the bell of the ball, right.

For sure. It's easy to, to loan on. There's, there's more distinct values, right, for market values, for real estate. So it's a lot easier to get that secured and, and get that done with the bank than may, maybe your receivables or your used inventory.

So give us some specifics, Chad. What are you guys seeing on real estate loans right now? So say I'm a dealer, I've got my property, maybe I, hopefully I own it guys, we talk about that all the time. Make sure you're paying for the land that's underneath your dealership. What are you seeing are the best terms, rates and sources right now for guys that have real estate? Maybe they want to buy what they're at, maybe they want to refi where they're at. What are you guys seeing right now?

I think with most dealers, hopefully you've started by getting a good, solid local bank relationship. And whether that's just with your checking and savings accounts, whether that's with your personal, you know, home mortgage, you need to be building that local relationship. And I think most guys then step up the real estate for their business and they take it to, you know, that particular guy that they've, you know, dealt with for the last 10, 15 years in their hometown. And, and they're, and they're looking maybe to, to get 65, 70% of the value of that real estate, you know, as far as some kind of line of credit or loan back to them, you know, a refi. And you're getting, I'm going to guess what, prime. Prime plus a point, you know, maybe.

Somewhere in there, sometimes below prime. You know, you might, you might get 6 or 7% these days, but drastically better than the receivables line of credit.

Yeah, I mean I think that's the below prime that seems. Yeah, I haven't, I haven't seen that yet. I mean we're at prime, we're adjustable at prime.

I've seen a couple below on the real estate just depending on you know, the, the other collateral that might be involved or the, the status of the dealer.

Yeah, give it, give it to us real quick. JP what did, what do banks want to see? What should dealers come in prepared for if they're trying to buy their land or maybe refi it to get better terms or something?

Well and I was just going to say if, if you did your real estate deal 10 years ago or pre pandemic, look at it again, you probably built equity, right? So you have more room to borrow if you need it. You know banks, these deals aren't as big as slam dunk as they used to be, especially if it's not a relationship you've already established. So you, you actually probably do need financial statements to, to secure a bank, a bank real estate refi or a first time real estate mortgage if you're not yet familiar with the bank. And so you know, you come with the financial statements, they're going to get an appraisal done maybe unless it's a pretty small deal. So kind of come in a little bit buttoned up showing your financial picture. You know, you have an appraisal and then of course you're going to have to get some various things like insurance lined up to kind of secure the deal.

When you say financial statements, give us more detail on that because I think that's something dealers get hung up on. They need two years, one year. I mean this is something they do in Excel, Quickbooks, like that's loaded question there.

But yeah, balance sheet income statement, a year's worth is normally enough. I've seen you know, real estate refinance deals right now where the underwriter, underwriters are scrutining the financials. It's not just a check the box. They're looking at your profit and loss to make sure you're making income that you can service the debt. You know we had a dealer that was, that had 470 out on his mortgage and it was worth the building's worth $3 million. And so he got a, you know, a refi done for about 1.7 but they, you know it was a full on colonoscopy of the, of the financial statement. So you know that may be a little bit extreme but it's Indicative of the time. So come in a little bit prepared, especially if it's a newer relationship and.

How J.P. you know, or Chad, either one talking about putting together a financial statement. And I believe that this is something that every business owner should probably have, you know, in his back pocket, right? Because you just never know when you're going to need cash or you never know when something's going to come up where you need to present this. If I were a novice and wanted to, to put this together, is it something I, I call you guys to do? Can my CPA do it that I currently use? How, how do I get this?

I think the answer is all the above, yes. I mean obviously your local CPA would have a lot of the data needed already to do that. Obviously, yes, we could do that. But I think you hit the one key thing I wanted to take from what you just said is this isn't. I'm running out of cash today. And now today I need, you know, this afternoon I need to put together my financial to present to the bank. Right? This is, this is something that you probably need to be doing on a monthly, at least a yearly basis. And there's, there's some guys out there that you know, don't do that. So this is something you need to have in your back pocket and have ready employees to, to present. But they're probably going to want two or three years worth of data. So it's not something that, you know, if you're flying by the seat of your pants and you're barely reconciling your bank accounts and your checkbook, then it's going to be difficult to pull together some, some accurate numbers. Sometimes, sometimes you have the P L but you also need those balance sheet numbers as well.

Is this a. Do banks ask for audited financial statements or is it just, hey, this is, this is what my CPA put together.

So when we're talking about these lines, these refis with the real estate, probably not, right? I have seen where they've wanted a comp just because of the value and they want to make sure that there's some compilation. So they want to, you know, making sure that the business financials have a little more put into it and somebody else has looked at it. But when we start talking about the receivable lines of credits and the floor plans, depending on the size, I think under 2 million facility, you're looking at a compilation somewhere between that 2 to 5, 2 to 6 million we've seen, you can get away with the review. There are Some that have asked as low as 4 million for an audit. But pretty much once you start getting north of 5 or 6 million, you're, you're, you're having to perform an audit each year.

If I'm. So if I'm a dealer and I'm, I'm kind of small or I'm starting out or I've been in it a couple of years and I'm putting together my financial statements and taking it to the bank to get this real estate loan. What are some advice you'd have for me as to how to present this to the banker? Because sometimes I find that when I go in to talk to a banker, they have no idea about the car business. They don't know about, you know, the fact that I have a reinsurance company. They don't know that, you know, I might run my dealership at a, at a break even or a loss, but my RFC is the one that makes this money. You know, are there any, are any potholes or advice you'd have for dealers?

I think obviously the starting point is, is getting an accurate financial statement together. I think you can combine all the entities together to show here's a balance sheet, here's an income statement, here's why I'm credit worthy. You know, if it's, if it's someone unfamiliar with the space, they should at least be familiar with what notes receivable are. Right. I'm financing my customers. You can explain to them what bad debt is, but how, you know, our markup and under the usury rate, interest rate are, are far in excess of, you know, what I eventually charge off to kind of explain why you're credit worthy. If it's someone, if it's a bank in the space, you know, your first line of credit was some of the, you know, the known buy here pay here banks. I think a key is that I had this earlier this week we got a call from someone who was looking to finalize financing with one of the buy here pay here banks. And they said, yeah, we want to get you done. We like the financials, but I don't see a reserve on, on for notes receivable. What are you, what your future losses are? I don't see bad debt charge off in the P and L, it's probably buried and your cost of the vehicle sold. And so having those little nuances, you know, nailed down with some accuracy can give, you know, the buy here pay here bank comfort that you know what you're doing through your financials.

I think when you present A bank or a financial. To a bank, and all of a sudden they call you out on the errors and, you know, now you're showing a half million dollars of profit, and then all of a sudden, once we make the adjustments, you're 200 grand in the hole, you know, to account for the reserve or different things that may not be on there. You're just not putting your best foot forward. So you really need to.

Yeah, I definitely. I understand what you're saying, and I don't want to talk about that. We get into some buy here, pay here, lines of credit stuff because. Yes. Making sure that you. You have your ducks in a row before you go. Give it to someone who definitely knows more than you, that can really shoot yourself in the foot if you don't have that put together.

Yeah. Jeff, one thing before we move off of the banking, the local bank, one thing we probably should mention is if you're a member to, to certain clubs, to social clubs and to Kiwan or Rotary or things like that, you'll find bankers in there. And that's a good way to go and meet banker, if you don't already have one. You know, you got to do business with the bank. Make sure you're doing business with a bank and a banker that you can talk to in text. Don't want to have to. You don't want to have to go through secretaries to get to the number tree. Yeah, you don't want to have to do that. So social clubs is a great one. Your local Kiwanis Club, Rotary Club, Lions Club, all these things. Bankers are in there every day. You know, find who's in where and, and become a member and, and start talking to your banker that way.

JP what, give a guess, what percentage of a local bank's approval do you think is based on the guy? The fact that the banker likes you and you have a relationship, man. A high amount.

Yeah, 50. You know, and it's not necessarily going to be the Chase bank, per se. It's going to be someone a little more local.

Right.

And I heard this long ago from someone, my mentor, like, people are going to work with the people that they like, so create a relationship, and that's half the battle.

So it's so much that the loan underwriter or the business banker at that bank, when he takes that to loan committee in the morning, it is him presenting. Hey, Luke's a good guy. He's solid. He's got integrity. I know this is weird, and we're talking about subprime auto loans, but He's a solid guy. Yeah. Let's do this deal. Right. Yeah.

I just had someone we want to.

Build a relationship with in the community. So that's.

I just had this conversation with my kid last week, and that is I walk into the bank to make my deposits. I don't go through the drive through. I want to wave at my banker. I want to say hi and small, you know, small talk. Because when I need something and I can pick up the phone, they know exactly who I am. I don't have to give them account numbers, and they just make it happen. Even if it's something that wouldn't normally happen over the phone or happen that quick, it's just having that contact, that physical contact sometimes goes a long way.

Yeah. And that's. I have Bible study with my banker. He. And that. And he's moved up now. He's the. He's the president of all business banking.

And.

And I go to dinner with him. I go to lunch with him. I play golf with him. And this is the kind of relationship you got to have to get things done. And I hate to say that, but you've got to develop that and you got to mind those things to, to. To make it happen. And walking in the bank is the first step.

Hey, so we're talking about lines of credit. One way that I'm doing it, Luke, is I'm actually going to be borrowing back from my reinsurance company. So that is a solution that can work for some people if you've built up enough money in that reinsurance through Buckeye.

Yeah, Jeff, we didn't even go. We didn't even dive into that during this conversation. But we've had our reinsurance company now for 13 years, and we have borrowed over $1 million back from it to use in our business. And it is really the cheapest money you will get. It's the easiest money you will get, and it's your money. You're lending it to yourself. Easy.

It's easy.

And so your reinsurance money is. Is being used and you are paying interest on it. So you're getting that interest income yourself. And it takes that to grow in our business. You've got to have cash to grow. Reinsurance, as we've said so many times, is the basis of wealth in our business. If you're not doing it, stop what you're doing. Call buck out today and get it done.

Let's transition to the second most attractive line of credit that dealers kind of look to. And in my opinion, that's probably A flooring line. Right. Because you know, bankers love real estate. It's got a hard asset behind it. They are not quite as fond, but they do like flooring lines. I think probably less and less these days, but at least it has some sort of an asset that they understand. Right. They know what the liquidation value is. That, and that applies to almost all dealers. Right? I mean the majority of dealers have to get a flooring line to get into business because very few of us are stepping in with, you know, a million dollars to floor our cars. Right. What are you guys finding? Dealers? Where are dealers starting with their flooring line? And then what's the progression of, of banks or institutions that these guys are going to?

I think from the very beginning of a new dealership, I think people are starting, I've seen this multiple times now. They're starting with their own 401k. They're starting with, you know, a real estate line off, you know, mortgaging their house to be their initial, you know, flooring line. Right. Cheapest form of money, easiest to get. But then from there it is going to the local bank. And what we are seeing is it's harder and harder for local banks to do the inventory side of things. They're usually still attaching to real estate, to some other asset at least that has some equity in order to do the inventory. They don't want to handle the titles and all of the paperwork that comes along with the asset based lending type thing that goes along with that. And then from there it is looking at the specific foreign providers in our space. We all know the names that are out there, but it is working directly with them. There are a couple non traditional names starting to pop up and people getting into the space. I think you're seeing some of the people that used to work at these names that we all know now branching off and starting their own outfits to lend to the space and trying to take away some of the red tape that is associated sometimes with those about moving titles back and forth. And you know, we all, we all hate that process. I think.

Can we talk? Yeah, can we talk about what? I mean because I think that there's so many people out there using the, the floor plan companies of the auctions and, and that, and that nature, what does that really cost dealers? I know it's not hard to get because it seems like if you, if you go to an auction as a new dealer, they'll throw you a hundred thousand dollars line of credit or floor plan just if you breathe, right. They check your Pulse and go, okay, yeah, you're there. What does it really cost dealers to have that type of flooring when they're, they're new to the business because they, because I tell you, oh, it's prime but, but we know it's not prime, right.

So yeah, the, the details are much different. Right. And that's where, why we often see folks when they're able to kind of graduate from the floor plan to a good receivables line of credit. But back to your question man, it's you know, we see, I see the best rates out there in for you know, kind of the floor plan companies we know of at like a prime plus two or three. But if you're starting out not yet kind of fully credit worthy in the flooring company's eyes, you're probably starting out at a prime plus five or six. And that's before the fees and a lot of, you know, a lot of floor plan companies will have you know, a flooring fee, a curtailment fee, you know, one or two other one off fees and before you know it, your you know, prime plus five today is 13 and a half percent. Before you know it. We do studies on these occasionally for dealers when they're kind of at a fork in the road. The 13 and a half percent overnight becomes 18 and a half to 20%. And so you know, I get it, it's, it's a necessity for some out of the gate before they're established, build equity and you know, can, can fetch another more affordable source. But, but if you're trying to decide between which to use more of where our advice to dealers, nine times out of 10 is when we get capital, when we get cash in, let's pay the floor plan down.

Is it going to be your most expensive cost of flooring line? What are some of the advantages and disadvantages of both? So say I'm, say I've got that next year line or that you know, maps line or whatever and it's kind of grown and I'm up to that half million or maybe I want to graduate to a million. How do I go out and talk to you know, maybe my rich uncle or my rich neighbor or you know, how do you present that in a way where it's attractive to say hey man, you know, you can give me a flooring line and I'll pay you 12%, you know, on every dollar because I know that's beating the crap out of my current flooring line. What are the pros and cons there?

I think when you think of, of pros, obviously, you know, your uncle's not going to hold title. He's just going to, you know, put money into a bank. And you're going to utilize that, right? So you have less, less folks hunting down titles or, you know, putting stuff in the mail back and forth. You don't have the floor plan audits coming every, every month or every six weeks to your, you know, dealership to, to hound you on that. So it takes away some of the, you know, interaction that you have to do, you know, with the headache. But on the, on the flip side, you know, your rich uncle may say, hey, I'm just going to give you this money. But then a few weeks into it, he's like, hey, I want to see some financials. And hey, what kind of cars are you buying? And, you know, maybe, maybe we need to limit. You bought that Tesla, Jeff. And maybe I don't want to, you know, fund that. I don't think you're going to get your money back on it. You know, whatever the case might be. I think you really have to set that relationship up in the beginning when you talk to friends and family and just make sure that you, you have the boundaries set.

That's funny. You think he wants to be in the lending business, but your uncle actually wants to be in the car business. And then he starts taking your business model on what you're doing. And that's actually how I got introduced to the car business. As my dad was flooring, he was a flooring line for a local dealer that was his buddy. And I remember, you know, running titles back and forth from my dad's safe over to this guy's dealership and exchanging it for two new titles. And I look back at it now and I'm like, geez, Louise, my dad had no idea what he was doing. It was completely based on trust. And yeah, he held titles, but he didn't know what the freak that title was for. He didn't know the value of that car. There was no ledger of equity, so it was more of an unsecured or a hard money loan. Right. And there's. You probably have a handful of relationships or you can develop them with people who have money who would say, hey, yes, I will do a, a hard money loan at 12% interest or 1 point a month, and we'll do interest only for X amount of term and we'll revisit it again in two years. Right? So there are those out there, and if you present it right, and again, you have Integrity in the space and in the community. That's a, that's a good investment for some folks to get into. Right. They can see it. They know what's going on. What are the, what are the upsides to having your traditional lines or is there a benefit to having both?

I guess, like kind of subordinated private money and having.

Yeah, you see a lot of guys running two, two different lines on their dealership. Or is it kind of an all or nothing type thing?

No, I mean, we see it obviously, you know, the, the bank is going to be senior. They're going to want first place on the receivables and on your business. And so the challenge we sometimes see is if it's not a family member, if it's someone a little more kind of at arm's length, they, they have a little bit of trouble with subordinating to the bank taking second place. So that could be a challenge.

But you see that on flooring lines.

No, I mean, the flooring line that you're talking about, you know, with your neighbor is, is a pretty informal relationship. Right. And I don't think, Chad, you know, flooring companies play well with one another, so it should work.

Okay.

I was referring a little bit more kind of on the receivables line.

Okay. Yeah, yeah. But, but on the flooring line thing, do you guys see or, or Luke, you've never had a flooring line, right? Luke, did you ever run two lines, like a, like a MAFS line and a private line? Or. I, I could see. I mean, I know. I'm just, I'm just thinking the benefit.

Would we have dealers that, that do that?

Yeah, you put it on your, your AFC line first, and then when it times out or when the curtailments become too extreme, you flip it over to the, the buddy.

Oh, I'm sure, I'm sure that happens. And that, that actually leads me to something I've seen. Flooring lines really get people in trouble. What are the pitfalls that y' all have seen dealers get into? And I know this is one of them, switching back and forth between four lines. Where, where can dealers get off balance and really get into a pickle when.

When they're keeping the car on the floor line. Right. But it's moved to the, the line of credit where the, for the, with the contract now. But you don't go pay off the, the flooring. Usually there's a delay. Right. So you sell the car today, you're going to get financing from your line of credit on the receivables maybe in, you know, a couple days or at the end of the week when you submit a borrowing base to, to get the funding. Technically, the, the flooring would say, hey, it's sold today. You need to put. Go in the portal and pay it off today or buy tomorrow. But dealers get that mindset of, you know, especially during tax time, maybe just all the hustle and bustle and they don't, they don't go back and pay that car off and now they get extended a little bit. Hey, I don't have a floor plan audit for another couple weeks, so I'll do it before they come out, you know, kind of a thing and it'll be good. But by that point maybe a big expense has come up and now they, they don't have the cash and now they're, they're upside down on their, on the flooring. It happens all the time and it can happen quick and snowballs quickly.

Yeah, that sounds like it will be out of business very quickly.

Yeah, yeah, we've seen it in this kind of recent credit cycle.

Yeah, yeah, we talked about that before we started recording is like, okay, yeah, a lot of dealers have. We were maybe hoping tax time would get us out of some of this heavy inventory that we're sitting on aged and, and it may not have done that for all dealers. And they're going to have a little bit of a reckoning here once they realize that the tax boat has sailed.

Jeff, I have three left. Three heavies. Three heavies left. Three.

Three heavies left.

Yeah, three heavies.

That sounds like your dating life.

That was college.

I've got a bunch no ed back, no question. On that note, I think about that sometimes. Do you guys have a lot of buy here pay here dealers who also have flooring lines? Because I've got about a million dollars tied up in my inventory, right. And I think to myself, well, if I could put that million dollars out at my 24.9 interest, why wouldn't I just pay a flooring line 12% and put that all on a flooring line and put all that cash back in my buy here, pay here operation. Do you see?

If you're at 12%, let's probably call it more like 15. That's 150 grand that you saved that year by. By not having the flooring line. You know, that for you is, you know, probably 10, 12 vehicles that you are able to put on the street. Own a lot of cash using, using that cash, right. So that, that compounds and So I think if you can avoid the flooring altogether, starting out or quickly pay it off, which is what most, you know, we would encourage most to do. Like JP Said, I think it only propels you into some liquidity and equity down the line.

But if I could use that cash to loan it out at my rate of return, is that not beneficial?

And also, can you put it on a receivables line? Can you use a traditional line of credit instead of the flooring line? I mean, you're still looking at, you know, the 15% as your cost, right? You're beating that by loaning it out. But can you do better than the 15% to claw the money back?

So instead of a boring line, go to a traditional line, which is what we're going to transition into. Great, great segue.

Hey, Jeff, I am going to see you in Las Vegas in about a month.

Yeah. Coming up real quick, guys. Hopefully you are signed up. If you're listening to this, and it is March 21st of 2024, you have a bow, two and a half weeks to get registered and get yourself to Vegas for Buy Here, Pay Here, United Summit.

Yeah, I booked my flights today. So last week when we talked, I booked my hotel rooms today. I booked my flights this morning. And I'm actually going to get out there on Monday and go drive some Porsches on the racetrack. So if anybody wants to talk to me about doing that, hit me up. But we're going to be at Buy Here, Pay Here, United Summit. We're going to be closing down each day. Get your rooms booked, get your flights booked, get out there. It's gonna be a lot of fun.

So this is going to be very specific Buy Here, Pay Here, guys. But where are you all seeing the best lines of credit? This is another question we get asked a lot in the Buy Here in the Facebook pages, right? A lot of people are looking at Buy Here, Pay Here. It's become kind of enticing again for dealers to get into because of rates and because of credit and because of car availability and all that other stuff. They want to get into Buy Here, Pay Here. They want to get started, but they need that money. Where are you guys seeing kind of the new guys starting? Where are they getting their foot in the door as far as lines of credit for Buy Here, Pay Here?

If, you know, if you're new to the space, then it's generally going to be either a local bank or one of the traditional banks, you know, that. That we know of at Primal and Spartan, that. That are Willing to, you know, take kind of a new, newer dealer or one that's not, you know, completely financially sound and financially mature. And so, you know, those are, those are attainable for sure. Obviously you, you would start locally if you built a relationship, but otherwise, you know, you would, you would look to one of the traditional names in the space and it comes at a little bit higher cost because you're a little bit higher risk, I guess, not having the season in the business.

Give me some advice on that. Give me some advice. Because you did it too, right?

Did what?

Do you have a local bank on your, or any of your receivables on a local bank line?

No, I have just real estate mortgage. Go ahead with what you were doing.

How am I going to go in and JP tell me, how do I go in and talk to a bank? Last time I went in and said, hey Mr. Banker, you know, buddy, buddy at lunch. So you know, I've got a couple million dollars in buy here, pay here receivables. Would you give me an interest only line of credit against that? He just stood up and walked out and left me at the table with the bill.

And it's dependent upon, well, sorry I interrupted you, but it, it's dependent upon, you know, the bank like certain banks that just simply, hey, we're not in that business.

But other, all of them. Are there local banks that are doing this? There are, there are that aren't. It's not just to a guy who's got $20 million in real estate that he's also put up like, and he's personally secured this. There are actual local banks that are saying, great, you've got a million dollars worth of receivables. I'll give you a 50% leverage on that with a UCC one on your whole.

Jeff, what's the harm? What's the harm if you secure a real estate loan tomorrow and it's your first, first time being introduced to this banker, what's the harm in saying, hey, by the way, here's the other stuff that I do, here's my financials. I, I just want to keep you a prize just to give you transparency and to kind of show you how this progresses and over time, man, if you, you pay well and develop that relationship, maybe another couple properties. As long as there's not a hard and fast rule by the bank, which granted, there are some. I get it, Jeff, for sure, then you might have a good shot. But it can't happen in a first meeting or overnight.

Yeah, J.P. i was, I Was gonna kind of go there with that. I almost have my banker talked into it. And we've been doing business with them now for 10 years. And it's just, it's one of those things. It's a slow, slow roll. When I first started doing business with them, we, it was like, okay, we'll take your real estate and we'll set up these tranches of 100 grand, you know, and then you've got to amateurize them and pay them off in three years. So we did that, we went through it. That worked for 10 years or eight years, worked perfectly. Then they got a little more comfortable. Now we, we're on a different product and it's, it's gone from, you know, a certain amount to three times that amount. And so we're starting to, and I can see maybe this time next year or the following year we go, okay, we finally got to the point where we wanted to be. But at this point we're 12, we're 12 years in. It takes a long time to develop that relationship and to get them comfortable with it.

And what I found is it takes 12 years or some period of time to get them comfortable with it. And the second you get the loan, it will be a year or two into it and that bank will get bought up by a regional and they'll completely change their lending guidelines. Well, some higher up will take it.

Get them to do a long term deal.

What are we doing here? And the second it expires, they will amortize you out and say, get out of my bank with that.

Well, there's, there for one, there's not a bad thing about being amateurized, number one. But, but also if you grow big enough, if you grow big enough, they have a real problem on their hands. But also if you grow big enough, you, you open yourself up to major banks, right? J.P. and Chad, there are major banks that do this, but you have to get to 10 million, 15 million portfolio before they'll talk to you. Correct?

Yeah. What is that, gentlemen?

I think one of the things I want to hit on there is that you, you know, going into a local bank, you need to fully understand what their capabilities are. If you're going in with a business model that you're going to get to $10 million need in the first, you know, two years, the local bank may cap you at 4 or 5 million or 2 million. You need to understand what their capabilities are. They can, they might loan you that initial two or give you a line. But if they can't grow with you, you know, you need to know that to prepare for next steps, not getting to the renewal table in a year and say, hey, I need to take this from 2 to 5 to keep my business plan going. And they say, no, we can't do that. You know, our internal lending limit is, is capped. So I think you need to understand, I think what also happens is kind of what Jeff was saying. You know, the moment something happens in the market or something changes, I think local banks are more likely to knee jerk and call your line and not renew it. When you talk about those that are specific to the space JP mentioned, the Spartans and Primalins, they understand the industry. They understand there's a cycle that happens every three to five years. They understand there's these ebbs and flows of the business or what's happening specifically in our industry today, you know, pre post pandemic, all the different aspects of it. They're able to make adjustments to your line a little bit easier or are willing to work with you maybe a little bit easier if there's a hiccup along the way.

That's true. I mean that's probably one of the good selling points or the pros. I think when people look at like a primal end or a spartan, some people completely love them and they think I couldn't have a business without these guys as partners. And some people think they're the worst thing in the world and they completely ruin their business and blah, blah, blah, blah. Because they do, they have been burned. And when you partner with a buy here pay here specific capital provider, they have their tentacles in your business. You have sweep accounts, you ask for your money back at the end of each month or quarter or week or however you have it set up. So. Yeah, but at the same time, like you said, they're also not going to knee jerk and just kick you out all of a sudden. Right. Like my bank has done to me three times over the last two decades. Right. So it's, it, there's a level of comfort that comes with those that really know what's going on.

Well, let's also, let's also think about, about this. Okay. They are lending to these people who are actually in the buy here pay here lending space. They're, they're lending to a business owner who has a high probability of failure to finance to a set of customers they don't want to finance. Right. So there is substantial risk in loaning to a buy here pay here dealer. Correct, guys?

Oh, for sure.

Why?

They charge the interest rates? They do, absolutely.

That's why we charge the interest rates. We do. And so these companies who are specifically in that business have to charge high interest rates and people have to wrap their head around that.

Yeah, yeah, I have a hard time wrapping my head around that. We talked about this too, guys. And I want to wrap back around to it is when we bring our financials to these people, both the banks and let's talk about the lines of credit that we're going to get on our buy here, pay heres and we want to go talk to Primal End or Spartan or one of these guys. What do we need to understand? We just don't want to call these guys on the cold and say, hey, let me send you over my QuickBooks file. Right? Because like you said, if we send over something that isn't in, you know, it's, it's in Spanish and we send it over to them and they speak English, we're going to have a real miscommunication problem. Because what we were calling bad debt, they call, you know, allowance for bad debt. And you've been charging this thing off and all of a sudden, you know, apples and apples don't match. What do we do in those situations? What would be a good first step before we go engage one of these, you know, lenders?

I guess I would preface this that with saying don't be afraid to approach them, even if, you know, you're not completely buttoned up. I've seen stories where Prime Lynn has someone or Spartan has B someone and said, I can't, we can't get you done today. Do these five things and in 90 days I'll come back or 180 days, they do them and they land the financing. So don't be afraid. But you know, when you're first talking to, to one of those banks, they're going to want to pull a data tape from, they call it a data tape from your dms which just kind of shows the big data file showing the portfolio performance and, and sales figures. And then of course they want, you know, some financial statements and put yourself in their shoes, you know, what are they expecting to see? Well, what is your buddy who already has a line, what, you know, what his financials look like? Are they in the right language? Yeah, that, that of course matters. Do you, did you catch the biggies that are important to the space, like bad debt, expense and reserve for bad debt, things of that nature. So you may, if, if you're only operating in your, within your own walls and don't have somebody in the space that's seen your financials before. You might want to do that as a first. First step before you kick them on.

Yes. If your aunt has been doing your taxes for the last 10 years. Yeah. Then yes. You want to call up JP and Chad and say, guys, here's my QuickBooks file and they'll take your charge off and move it from cost of goods sold down to charge off. Right. So that's. You don't embarrass yourself when you send your financials in. So, you know, again, plug for these two gentlemen, reach out to someone. Because I know you helped one of my buddies get a line of credit just recently. Right. And I don't know what the, you know, I don't know behind the scenes on that, but I know it was something where he was ready to grow and you guys helped foster his financials in a way where now the banks, after a period of time, said, hey, yeah, we can take this risk. Let's move forward. Hey, everyone, one more break in. Of course, great sponsor of the podcast is Blitz Pay. It is how I get my money back. You know, and. And when we talk about having capital and having access to capital, for me as a buy here, pay here dealer, it's the. Let me look real quick. $120,000 that is now due to me today. Right. I've got $120,000 one day, $1 past due accounts. If I could get that money collected quicker and back in my bank account, that helps a lot with my cash flow and making sure I can buy more inventory, finance more cars. Right. So getting quicker payments is what Blitzpay is all about.

Yeah. And getting the deposit into your bank account quickly after the processing is done. Something Blitzpay actually called me about last week. They're trying to speed that process up for us as well. You know, some banks can take 48 hours or 72 hours. Not Blitzpay. I'm telling you, these guys know what they're doing and these girls know what they're doing. And so call them up, get it done.

Yeah. Make sure you mention us when you do call them. Say you heard it on the podcast, and they'll give you three months of the software for free. That's the payment collections platform. And they're also doing three months of their cash network, which should be rolled out to everyone hopefully soon. So you make cash payments anywhere in the network. So really cool deal coming up. Make sure you mention the podcast when you give them a call.

Yeah, no, that was a common story that we come into. Right we were, everything's more expensive, we've stalled out. We don't want to fire, we don't want to cut all our overhead. So we need to grow, right. And we're financially sound, but we just don't know quite know how to present it. And so it's so common, man. We're good at, we're good at cars. Financials often come as a, you know, the last thing we think about, like, oh, does my DMS do that or do I need to integrate or.

So, yeah, I want to wrap this up with talking about one other topic which is kind of these non traditional, you know, areas. And I think for me, one of the, you know, we touched on it a bit with the private money stuff, but that seems to be one of the biggest success and crash and burn stories that I typically hear, right, is like Mr. Owner Operator or Mr. Dealer Partners up with acquaintance that's got, you know, billions of dollars sitting in his family's trust and all of a sudden he wants to get into buy here, pay here and help you finance it. And you burn through 10 million in the first six months and homeboy just yanks the carpet out from underneath you. Right? Yeah. What, what have you seen that, what are some ways to mitigate against that? And then what are the other like, non traditional type money sources that you guys have seen dealers utilize?

I, I think from a, a standpoint of how to mitigate some of those risks, it's just being up front, right, and really spelling out, I think some of the documents. Sometimes between private money and a dealer can be vague. You know, it is a, a lot of times it is a buddy or an introduction from a buddy to a buddy. And, and you know, those don't spell out all of the, the covenant. You know, when you, when you talk about other lenders, you're required to give them financials once a month or you know, show them, show them certain things every month or every year. And then a lot of times that language is left out of these more buddy, buddy type or, you know, personal loan type of arrangements. And so you get six months in and the, the investor kind of gets wind that maybe the dealership's not doing as well and now he expects all of this stuff or, you know, he wants more visibility. He wants to come on, on premise and walk around and talk to folks. I, I have, I have a perfect example of a client who, who did this and the investor got pretty intrusive and making phone calls, not only to employees, but making phone calls to other lenders that were within the, within the, the business and, and caused havoc. Right. And caused concern. Now the other lenders are concerned that another lender is, is questioning the health of the business. Right. So it really opened the door. So it can get real intrusive quickly and can get, you know, carried away there. But it's really being up front, I think, on those types of relationships, on what to expect.

Is there, I mean, is there a packet for this? You know, I mean, like, does. If, if I have a friend who wants to give me money and I'm a dealer out there, how do I make sure that it's set up to protect him and me? Is there a certain attorney in our, in our space that, that really focuses on this? Is it something that y' all have availability to? Because the pitfalls here are tremendous and there's got to be a, somebody needs to, to develop a packet to make sure this is done because it's done every day.

Well, when you go golfing and you're in the, in the threesome, it's your, it's your banker and your attorney is my guess. So the, the attorney is, you know, I think we all just need to get somebody involved. This isn't go online and find a mock up that I pull offline and I have to retype because I can't convert it into word. And you know, you're just pulling the language. This needs to be specific to your, to your situation. So, so yes, there probably are some attorneys that probably have more experience in this space, but somebody with those, with those credentials needs to be putting this together for you.

It doesn't need to be a handshake, right?

It does not need to be a handshake.

Yeah, I think that's what, that's what we fall into, right? Which is, oh yeah, he's going to loan me some money and we whip up some silly little piece of paper. But obviously our advice is, guys, spend the money. Hire JP and Chad to do a pro forma, to do projections, realistic projections of what it will take to scale it. How you need to scale and take the time and investment to then present that to your investor and say, hey, here's the pro forma, here's what we're going to hit. This is the cash it's going to take. Cool, great. Let's wrap a promissory note or a loan around that and maybe we reach out to, you know, Steve over at Ignite or someone who really knows the auto space to. Just like you said, you, you button it up front and spend a couple dollars to make sure you're all on the same page, right?

Under understand where the use of funds is going to go. I think what you just said, look at those projections and understand that if I receive a million dollars, can I grow my portfolio by 2 million? Right?

Yeah.

Can that happen? Prime example. Dealer comes and says, hey, I need a line of credit. Oh, what are you going to, you know, use it for? Oh, I want to grow my portfolio. Oh, can we look at your financials and see what's going on? And then on the financials, oh, your back sales tax is half a million dollars, right? You haven't paid that for a while or, you know, you, you, there's all these other things that really the dealer doesn't need to grow or want to grow. He's really needing it to get himself out of a bind. So set the expectations, right? So when I go to my friend or go to another banker, they're going to want to know, hopefully they're asking those kind of questions, you know, how are you going to use this money and what's it going to be, you know, what's it going to get me in return as far as, you know, business growth and that kind of thing.

And you probably should sit down with that person that, that gives you that money and show he, show him these things once a quarter or something like that so he doesn't start showing up at your dealership and going through all this.

I think those guys have the right to, to have that information. And offering something up front probably goes a long way in keeping them at bay and not, you know, walking in your door asking for stuff.

I agree.

It can be light monitoring. Think about, you know what, the traditional banks in our space are pretty heavy monitors of the collateral. It, it doesn't have to be much, you know, once a month or quarter. Hey, here's, here's my receivables. Here's what you've loaned me. Here's the percent we wanted to keep it under X. And then you've at least, you know, it could go sideways. We see it all the time where it has gone sideways and it's too, too far gone to recovery.

So with, with any other lender, you're doing a borrowing base. You're, you're creating some kind of document that says, this is my leverage rate. And a lot of times with private investors, we don't do that document because they're, they don't know to ask for it. But it's still a document that we should be doing internally as a business owner to say, you know, how am I leveraged? You know, I want to put a cap, and I don't want to go above 40% or 50%. And, you know, a lot of times we get carried away. And before you know it, you know, your leverage, 70, 80 cents because there is no principal repayment. It is interest only. I just repoed a bunch of cars, I wholesaled them, and I never paid them off with the guy because there's no requirement to. So you can. You can. As much as it's a better interest rate and comes with less red tape.

You need to put your own boundaries in place. Right.

You have to put the boundaries in place so you have to manage those expectations.

If you're borrowing 100 grand from someone, you better be putting 200 grand on your books. Right. That kind of a thing. Guys like, make sure you're growing the receivables. And it's not the number one thing that happens when people get money. Dealers, they go out and buy a boat. Don't go buy a boat just because you got a line of credit from your bank or your neighbor or.

Yeah, or a Porsche or a Ferrari or whatever. The jet. Oh, every time. All right, guys.

Be anything else we didn't touch on, gentlemen. And how. And how can dealers get a hold of you guys if they want more financial guidance?

Yeah, online. Mbac-accounting.com Our information is there. Mbac-accountin.com I think in this environment, buttoning up your financial picture is really important. Creating banking relationships and being patient. It is. Within this last credit cycle, it's been tougher to do what used to be foregone conclusion on, you know, real estate refinances and lines of credit. So thanks, guys.

Gentlemen, thank you so much.

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