Have you considered buy-here, pay-here? This is a good time to make the move. If you have and wondered where to start, here is a ‘beginning’ you can use to get moving in the right direction.

There are many things to consider. We are discussing you establishing a dealer controlled finance (DCF) business. There are different ways of establishing your DCF operation. Let’s start with being a buy-here, pay-here (BHPH) store or a lease-here, pay-here (LHPH) store.

The difference between the two operational models is minimal, and about 90 percent of the two models are identical. You are dealing with the same inventory, clients, associates and processes. The financial aspects and descriptive terms used are different, such as down payment and capitalized cost reduction. Interest rate and money factor in, as well.

When you finalize your deals in LHPH you will be signing a lease agreement to fulfill the lease terms. In BHPH you are signing an installment contract with lending terms and a payment schedule.

In some states, leasing makes more sense due to the cash flow advantage of deferred sales tax. There are different “right to cure” laws also that make recovery of your collateral easier since the vehicle remains in your company name. In bankruptcy, your leased vehicle has to return as there are no provisions in federal bankruptcy for leases.

A down side: On a lease, the car remains in your company name as owner, and a “note lot” customer is out driving it.

With a few exceptions, none of these advantages or disadvantages are so huge that it makes much difference in your decision between BHPH or LHPH. Depending on your location and personal situation, one method could have a slight edge over the other.

Deciding Which Licensing Route to Take

Another aspect of how you choose to operate (BHPH or LHPH) is licensing. You will need to discuss the necessary licenses for your state and what differences there are between licensing the different models.

In BHPH you will typically establish a related finance company (RFC) to help defer tax liabilities and provide a layer of protection between customer issues and the dealership (marketing) operation.

In almost all states a LHPH operation does not need an RFC due to the tax differences in leasing versus selling, but you may be required to maintain a leasing company license.

If you operate an RFC you may need a separate business license for this company. Also verify if a wholesale license is needed for vehicle disposal (repossessions). You can check this with your state licensing body (state police), go to or talk with your state dealer association.

If you intend to establish a BHPH model and setup a related finance company, you will need to look at having these entities listed as Chapter C or S corporations for tax purposes. The RFC is the “assigned lender” in your transactions and will house the capital in order to purchase the loans from your dealership operation.

In this transaction, the RFC “discounts” the loan payout to the dealership to defer the risk of the note. In your tax filings, the dealership will Have to file using a standard profit and loss statement that does not allow for the “as earned” aspect of a BHPH business. By selling the loans to your RFC, the discount helps defer the amount of profit shown on the profit & loss for the dealership while the RFC is taxed on the “as earned” income.

In a LHPH operation the lease payments are taxed as the income (similar to the RFC), therefore a deferment is built in and the RFC may not be necessary.

What Level of Capital to Use?

So what is sufficient capital? You should have access to enough capital to get started, as well as grow to a point where the operation can be self-sustaining.

The days of taking $100,000 and turning it into a thriving BHPH dealership are all but gone. Between your money, lenders and floor plans you will need about $1.5 million to $2.5 million (depending on your business model) over the next two years to create a stand-alone BHPH operation that will be able to sustain itself beyond that point.

Of course, you can put a few cars out a month to sell a few extra cars and help a few more people. The problem is that once you have put 20 to 30 cars out you have invested $150,000 plus, and you have the same challenges the rest of us have, managing the customer issues, mechanical problems, account monitoring and cashiering, all while cash flowing under $10,000 a month.

If you have some of the capital to get started you can begin to borrow from many different lenders that operate in different ways. There are lines of credit available or you can sell your portfolio in blocks (tranches) as you grow. You can sell each contract separately with a different group of lenders.

Establishing what is best for you and how you will handle this issue will be dependent upon your personal situation, business plan and lenders operating in your state. You can contact me for a list of providers at

In LHPH there are less capital providers in the market to help you acquire capital, and this is another reason to look close at which business model will be best for you to establish.

Where Do You Plan to Open Your Dealership?

Even though BHPH is mainly about financing and collections, you are still opening a car dealership for selling cars and need space to welcome customers and talk business. You will also need to plan on how to deal with reconditioning and post-sale repairs, which is another important topic.

Working on the vehicles is one of the “facts of life” in BHPH, and how you deal with that needs to be addressed. So as you decide on the correct facility to use, consider repairs and storage of vehicles.

You will need to have a facility that will allow for the showcasing of vehicles, hopefully in an open parking lot with road frontage. However, there are many ways to display and market inventory.

You will need an area used to welcome customers in and have space for your sales offices.

It is best to have an area where sales people can have semiprivate conversations with customers and also be able to see a good portion of the inventory from inside. There will need to be other offices where management can operate privately so discussion of deals is away from the customers and private discussions with problem customers and employees can take place.

You may need space for accounting if you will be a stand-alone operation. This can be shared with your title clerk, filing and other customer service operations.

In the common “behind the scenes” office area you will need a copy machine, fax machine and a lockable area where you can protect customer documents and deal files (in lockable, fire-proof cabinets).

Organizing a Collections Department

There will need to be room for your collections office. As you start out this will be one person, but as you grow you may need to add more, and occasionally your collector will need privacy to deal with customer issues.

Then there will be the busiest spot in the building, the cashier. This should be a secure area (lockable) where money is taken via a window of some design. Think bank teller or cash window at a casino. I always have my collector’s office and cashier area next to each other, so the two associates can communicate as customers come in to pay.

This leads us to the amount of traffic you will experience as you grow. Not only will you have busy days on the sales floor, but you will also have regular traffic in your cashier area and collections. Whether you provide service at your facility or through a sublet, there will be regular traffic coming in and out solely for repairs.

The bottom line is you having ample room and a flow pattern to accommodate all the incoming and outgoing traffic for all the different customer needs. In my last operation (one location, 700 accounts) we experienced about 4000 unique transactions a month just for the cashier. More than 1,000 of these transactions were over the phone, but having 50 to 80 visits a day is quite a bit of vehicle and foot traffic.

Plan your facility for growth and make sure you can stay for a while because moving is not easy and can be expensive. What facility you have access too isn’t always ideal, but sit down and look at a plan from above. While you are looking think of branding. Having an identity as a business is important. If you look like a typical “note lot” that is who you will attract, note lot customers. The building and surrounding property are part of your image and will play a role in your marketing and attracting the customers you want.

Gene Daughtry is an experienced trainer and consultant specializing in BHPH/ LHPH dealership operations. Daughtry’s experience encompasses retail indirect financing, leasing, RFC general management with full operational control and portfolio management. He has 16 years total of BHPH experience covering three uniquely different operations. Follow Gene on Linkedin or his website at dealers411.Net. Operators can email him at gene@dealers411.Net or call (479) 970-4049.