In-house Financing

Published in Boat and Motor Dealer

Few boat retailers use captive financing for all their credit customers, but it can be a significant capital generator when properly implemented. However, along with increased sales and interest payments comes increased risks which must be considered. A disorganized credit department will be a cash drain, so minimizing delinquencies and repossessions requires control of the loan portfolio.

Typically, retailers only do captive financing with customers who don't qualify for bank financing. These customers are the most likely to result in delinquencies and charge-offs. Loan origination policies and TRW screenings only go so far in reducing problems.

Organize Approach

What is the best way to organize captive financing? The two most common options are to have the work done by a service bureau or to service loans through an in-house computer system. For the past few years banks have been facing the in-house vs. service bureau debate. With the cost of computer technology going down, most banks are turning to computer software to service their loans. Ten years ago, approximately 15 percent of the commercial banks in the country serviced loans on their own computer system. And, now, over 50 percent perform data processing in-house. In fact, many small banks use PC-based systems because a competent service bureau isn't available to them.

Choosing between in-house and service bureau administration of loan origination and servicing can be perplexing for boat retailers. The wrong choice can exact a heavy toll in time and dollars - and take years to rectify. Many factors influence the decision to bring servicing in-house, but ultimately the key factors will be cost and control.

Start-up costs are high for an in-house system, so the question is, how long until the software and hardware investment is fully amortized? If a new employee is needed just to run the system, the added salary must be incorporated into the equation.

The other consideration is how much control is gained. Software which simply kicks out repossession notices after 30 days is inappropriate, but chances are 15-20 percent of bank rejected borrowers will be slow payers. The software must be adaptable to work out payment schedules, and also must be able to handle different interest rates, zero down for 90 days, and other specialized loans. With smaller clients, most service bureaus will batch-process their entire portfolios, which hardly provides the control necessary to reduce delinquencies.

Before committing to an automated system, consider the advantages and disadvantages associated with the decision.

Advantages of an In-house System

Fixed Costs: Once the initial investment in hardware and software is made, costs are fixed. This can be economical if the plan is to expand captive loan financing. With a PC based system, the more loans you make the less expensive the servicing costs per loan. Service bureaus generally charge the same rate per unit charge.

Marketing Tool: The information culled from a well organized loan portfolio can provide meaningful information about the business and its customer base.

Customized Service: No payments for 90 days! Low interest charges! Low down payment! A PC-based system must handle these different loans, or else the retailer can't offer them, and prospects enticed by these offers will go to another dealer. Also, many lenders charge different interest rates to various customers, depending on associated risks. Most service bureaus can't process a group of loans with different rates.

Independence: With an in-house computer system no one else dictates how the loan portfolio is operated, allowing the retailer to distinguish itself from competitors who can only offer loans that the local service bureau will accommodate.

Disadvantages of an In-house System

Increased Risks: The data processing system is entirely the retailer's responsibility. If the software vendor doesn't make frequent upgrades to meet changing needs, obsolescence is a risk.

Increased Staffing: If the system is too difficult to learn, data processing personnel may make critical mistakes, or additional DP people may be necessary if the system is laborious and time consuming. Also, time invested to operate the system is time not spent on other needs.

Software/Hardware Surprises: Software demonstrations are designed to indicate the strengths of a system. But if they aren't applicable to the retailer's needs, the strengths are worthless. The software may also be incompatible with existing hardware.

Selecting The Right System

The first step in the selection process is identifying the credit department's needs. What problems must be resolved immediately, and which problems are manageable? Establishing priorities is essential, because a cure-all software program doesn't exist; an ideal program addresses a retailer's most urgent problems.

If possible, choose the software before the hardware, because finding a computer which is compatible with a specific software program is easier than finding a program that addresses the department's needs and is compatible with existing hardware. Selecting a state-of-the-art program to run on an out-dated computer is imprudent.

Finally, the software must be expandable, not only in the number of customers serviced, but in the number of features offered. It should be compatible with loan organization software, and perhaps offer a version which works on a Local Area Network (LAN) or Wide Area Network (WAN) if the retailer has other locations. A modular software program should be able to grow as the retailer's needs change.

Obtaining a loan servicing system represents a significant investment for boat dealers. While a computer isn't an instant panacea, it can turn a captive financial program into a reliable cash generator.

Eric J. Christeson is the Chairman of Dynamic Interface Systems Corp. (DISC). The Los Angeles based company is the World's largest supplier of PC-based loan servicing software, with more than 1000 systems installed worldwide.