Dealer John Palmer is mining gold from the growing pool of car buyers struggling with credit challenges. In fact, his Davenport, Iowa Quad Cities Suzuki dealership generates 90 percent of its new car sales from credit-challenged consumers. Palmer credits his success with special finance customers to a sales process focused on marketing and selling to credit-challenged buyers. He says dealers who decide to pursue this business aggressively can boost their monthly unit sales by 25 to 30 percent.

In addition to being a dealer, Palmer is also the CEO of Promaxonline.com, a Web-based desking tool that helps dealers mine special finance opportunities. He knows that the right attitude about the special finance buyers, coupled with the right processes for capturing their business, can help a dealer sell more vehicles. Most dealers, he says, turn away a good number of these buyers every day, often without understanding their potential.

The special finance opportunity today is absolutely huge, but my gut feel is that only 20 percent of all dealers are achieving anything near the potential they could in special finance, says Palmer. The average sub-prime customer would much rather get a new car from a known dealer than from Bills Used Cars, but they dont know that they can do that, he notes. The message, Palmer explains, is that dealers need to communicate that theyre in the business to match credit-challenged consumers with the right lenders and the right vehicles, if they want to get their share of this lucrative market.

Out with the old

As you move through life, do your perceptions about people, places, and things ever change? I will bet they do, and with the growth in the subprime auto market, now is a good time to change your perception of special finance customers. Your outdated attitude might be standing in the way of potential sales.

Some dealers may be hesitant to pursue special finance customers, not because they dont see a potential market, but because of a past bad experience with a vendor or lead provider back in the 90s, when special finance was first evolving, notes Michael Snider, national sales manager for CIQ Inc./Voisys.

While there are still risks inherent in dealing with special finance customers, the climate has changed with several very large financial institutions such as, Chase, Capital One, and Citibank, moving into this space over the last decade. In 1995, if a dealer got into special finance, they typically dealt with smaller financial institutions. The landscape is very different now. With a completely new set of large financial institutions involved, it should help minimize any risk.

Technology can also help you manage these consumers. Technology helps dealers structure the deal and match lenders conditional approval or payment call with the right vehicle in the dealers inventory for that consumer and the dealers profit, Snider says.

An increasing pool of buyers

The special finance customer is generally defined as a buyer with a credit or BEACON score of 650 or less. As the economy cools and the housing market continues to reel, the number of consumers who fall into this category will only continue to grow. Melinda Zabritski, director of automotive credit for Experian Automotive notes that for the second quarter of 2006, nearly 36 percent of all loans originating during that time were below 650. That percentage has risen to 37.4 for the same period this year. In addition, U.S. foreclosure filings surged 90 percent in May from a year earlier, notes Bloomberg.com, citing statistics by RealtyTrac Inc.

One significant cause of credit deterioration is personal bankruptcy. According to the American Bankruptcy Institute, U.S. consumer bankruptcy filings increased more than 37 percent nationwide in June, compared to the previous year. It should be noted though, that 2006 filings were the lowest since 1988, mostly driven by the implementation of more restrictive bankruptcy laws in 2005.

This is a market that is growing, says Zabritski. Of loans below 650, nearly a third falls below the 550 level, which is the biggest growth area in the high-risk category space.

Todays special finance buyer is often a once-creditworthy buyer. The continuing trend of upside-down buyers adds to the cauldron of troubling credit times. Still, these consumers require transportation, and a dealer structured to meet their unique credit needs can get their business and grow their net profits as a result.

This certainly is an opportunity for dealers for a couple of reasons, Zabritski notes. When you look at the credit range from the mid-600s to the low-600s, the loans in this segment and the characteristics of the buyer are not all that much different than from prime customers. But [the] perception is that the severe subprime buyer, those [with a credit score] below 550, buy a significantly different vehicle than everyone else. This is not the case. She continues, Based on our most recent trending analysis, were seeing that consumers with bad credit are buying more premium vehicles in the used space. In fact, a third of them buy upscale vehicles. For instance, our studies show that a little more than 19 percent of consumers who buy a used Mercedes have a credit rating below 550. The perception that the higher risk consumer buys a very entry model is not really the case.

These sub-prime consumers represent a significant moneymaking opportunity. Voisys/Credit IQs Snider notes that front and back end gross on used vehicles sold to subprime buyers can average $2,800 to $3,300-that is more than new-car prime!

Deliver what these buyers seek.

Most people who have been in this position for some time realized their car buying experience is different from that of their more credit-worthy peers. These buyers, however, still warrant respect. Despite credit woes, their dignity remains intact and they want to be treated fairly and professionally.

Subprime auto buyers understand that your role as a dealer is not to put them into the vehicle of their hearts desire, but rather to get them financed. The vehicle they will drive once you get them financed isnt that important.

Credit-challenged customers arent as concerned about the type of vehicle they can purchase, but are more concerned about whether or not theyll get approved for credit, notes Rory Holland, executive vice president of special finance lead provider, Blue Sky Marketing. Working this sort of deal requires a different skill set and a dedicated special finance specialist if the dealer is to be as successful in special finance, he adds.

Essential to success with the subprime market is having the right inventory and having lenders wholl buy subprime paper.

Inventory mix and the proper lenders are essential, Holland says. Dealers will want to inventory 2001 and newer vehicles, which is the type of vehicle most lenders will loan against- these are the vehicles in the $8,000 to $12,000 price range that fit into a common special finance payment call of $300 to $450 a month.

American and Korean cars-what some call off models-can be bought at auction at book value and matched to special finance buyers for a good margin. Palmer, the Suzuki dealer and Promaxonline CEO, notes that vehicles like Suzukis Forenza model, Fords Focus model, Chevrolets Cobalt, and other economy cars, which retail for less than $20,000 and often come with buyer cash, can make attractive subprime new car deals. Be sure to have the right inventory for sub-prime buyers in your market. Look at what is selling in this higher-risk, fast-growth segment and what buyers in that market are buying, advises Experian Automotives Zabritski. If you look at loan characteristics, their loans are not that significantly different than those in the prime consumer space &ndash- the average amount financed for prime is $20,000. Overall, from a dealers perspective, if you want to play in this market, know what this market is buying and then stock appropriately.

What is your sub-prime process?

A marketing and sales process in your dealership for handling these buyers is necessary to achieve any real success.

Bringing on qualified, dedicated personnel who specialize in working with sub-prime customers is a critical component for success. Having an Internet manager work your special finance customers simply will not work. Sub-prime buyers have special needs and require special handling and follow-up, says Holland.

Too often, dealers cherry pick these buyers- they pull credits and if the shoppers rating doesnt meet the dealers criterion, the buyer is given the heave-ho. This too is old thinking and should be filed under the out with the old category.

The credit score doesnt necessarily mean anything, Holland notes. A lot of rich people have bad credit and pay with cash or have co-signers. You need a process to maximize these opportunities.

Dealers who try to put every sub-prime shopper into a vehicle will close 10 to 12 percent of them, Holland notes, but again, the right process must be in place to make this possible.

One part of such a process is having specialists who understand this buyer, has the patience to listen to their hard-luck story, and can work the deal to get the right match. Software tools that help match lender, payment call, and inventory to the buyer can speed the process and remove risk of mismatching these criteria.

The sub-prime sales process has to be slowed down, Snider notes. It requires special listening and emphasizing skills. Even though these buyers credit is bad, they feel they have buying power because they hear the ads on radio and TV that tell them no matter what their credit, they can be approved. They feel they deserve to be treated like a prime buyer, whether entitled to it or not, and if they dont get that treatment from your dealership theyll go elsewhere.

Another important reason for treating these buyers with such attention is their power to refer others to your store. Referrals can be huge, Snider notes.

Where youll find these buyers

Lead data from various sources can help dealers locate these buyers within their markets.

Most critical is filling the pipeline with customers who are intent on purchasing a vehicle, whether acquired through net leads, the dealership Website, or other means, notes Blue Skys Holland. Many dealers are already being visited by a number of sub-prime buyers who are too often shuffled quickly off the lot once their credit-worthiness is determined. Do not base your perception on a buyers dress or credit scores- these buyers often pay cash, or shop with a co-signer.

You need to maximize those to begin with, notes Palmer of Promaxonline. They probably amount to 20 percent of your floor traffic, but dealers miss this opportunity because they choose not to pursue this buyer or when they do they mishandle him.

Now you know where to find them- get ready to put them into a car. We have already mentioned that this buyer needs special handling. So having a process to handle these customers is vital.

Do not try to work these customers by phone or email. The strategy that works is to get them to set an appointment with you at the dealership, so the special finance manager can plan for their arrival and be prepared to take the time these deals often need. Thus, have a process to handle this customer.

1. Understand what your banks and lenders are buying. Online financing tools offer more lender variety, especially those who want to buy sub-prime paper.

2. Dont base your perception on a buyers dress or credit scores- these buyers often shop with a co-signer, or pay cash.

3. Understand this buyers circumstances, and that despite their credit history, they still feel entitled to their vehicle of choice.

4. Dont try to work this customer by phone or email- the strategy that works is to get them to set an appointment with you at the dealership.

5. Work this customer backwards- dont let them wander the lot to find the cream puff of their dreams- assess their credit and match it with a lenders payment call-then find the right match for that in your inventory that meets the buyers situation and makes money for you.

Online financing tools can also help find financing for these buyers. They offer more lender variety, especially for those who want to buy subprime paper.

Likely, some dealers will choose to forgo the profits that selling to the subprime buyer can generate for them. These buyers may be unattractive to the dealer, the dealers processes may not favor handling these buyers, or the dealer may not want to modify his or her inventory plan to accommodate the kinds of vehicles most appealing to this buyer.

Palmer doesnt understand why any dealer would embrace that position. For a dealer to not want to get involved in subprime is like a dealer saying he does not want to sell to the truck buyer because he doesnt want the truck buyer in his store.

Those who have been in the business long enough, remember when the truck buyer held the same kind of stigma. Today, the truck buyer has kept many a dealer afloat.

In a few years, perhaps the same will be said of the special finance buyer. This market is a growing opportunity dealerships cannot afford to neglect.

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Sifting Out The Chaff

Technology that matches your customers financing needs with a number of lenders, makes funding easier and less risky than ever. Dealers can be quickly pre-approved or funded so the deal can move forward with the knowledge that the customers paper has a buyer.

Steps to purify the special finance lead are also underway. The concern is not so much for the quality of the shoppers credit, but rather the intention of the individual submitting the lead. In fact, industry observers say that buyer intention is a significant challenge for dealers in the special finance market.

The cause of this problem is online credit application sites that offer promotional coupons to entice shoppers to apply. Consumers often apply at a number of these sites-vehicle finance, mortgage lending, and other credit-driven purchases-to collect coupons offered for completed applications.

Its not that the consumer isnt completing these applications or that that their data is bogus. The problem is&hellip-they really arent interested in buying, notes Rory Holland, executive vice president of special finance lead generator Blue Sky Marketing.

When such leads find their way to a dealer, the call to the lead might get a response like this: No, Im not really interested in buying a car- I just wanted the coupon for the free diapers the site offered me. One doesnt need to connect with too many leads of that caliber to decide the whole batch of them is trash as well.

Holland says the industry works hard to filter out such leads. Blue Sky, for instance, uses a pre-screened direct mail strategy to mine qualified special finance leads. It pulls data from credit bureaus and live credit data from its dealership clients and then runs it all through a 500-item demographic and credit parameter profile to sift out only the best. Those with true buying intention are then sent the next day to its clients.

All this clicking for diaper coupons leads to duplicate leads, as does normal, well-intentioned clicking by real shoppers at various lead-generation Websites in hope of enhancing their chance of obtaining credit approval. This overwhelming number of duplicate leads dealers receive is a problem, notes Michael Snider, national sales manager for lead provider Voisys/Credit IQ.

Online shopping will continue to increase and credit quality is decreasing with nearly half of all Americans considered non-prime borrowers, he says, reminding dealers that a huge number of potential customers are actively cruising the Internet and clicking on sources for special finance, which generate those leads for dealers.

He advised dealers to be certain the leads they are buying are delivered in real-time and that leads come with a time stamp- with this appendage you can better track duplicates and then get credit for them from their provider.