Capital is growing harder to come by for buy-here, pay-here dealers.
A number of large capital sources, including Wells Fargo & Co. and Capital One, have exited the market, said Ken Shilson, founder of the National Alliance of Buy-Here, Pay-Here Dealers.
Shilson said dealers must now turn to non-bank finance companies and change their strategies toward slower growth.
These non-bank entities include hedge funds and private equity firms.
Both want higher returns, so the cost of funding increases.
“It’s more expensive than banks, but less expensive than going out of business,” Shilson said.
The worst move to make in this environment is trying to sell more to make up for these higher costs, he said.
The good news for dealers is this change is part of an overall trend of moving away from subprime auto finance by some of the large banks. That means more customers with higher credit scores will shop at the buy-here, pay-here stores.
“The guys that have capital are going to have better customers coming into the market,” Shilson said.