Starting a Buy Here Pay Here Dealership in California

October 8th, 2024 by Garrett Eddings

A Comprehensive Guide.

The "Buy Here Pay Here" (BHPH) dealership model is a type of automotive dealership that offers financing directly to customers who might not qualify for traditional loans due to poor or limited credit histories. Unlike traditional dealerships, BHPH dealers finance the vehicles themselves, allowing customers to buy and make payments at the dealership. While this model can be lucrative, it requires careful planning, adherence to regulatory requirements, and a solid understanding of customer service. This article will guide you through the steps to start a BHPH dealership in California, the application process, and best practices to ensure success.

1. Understanding the Buy Here Pay Here Business Model

Before diving into the process, it’s essential to understand what sets BHPH dealerships apart. In a typical car sale, the dealership sells the car, and a bank or financing company provides the loan. In the BHPH model, the dealership takes on the role of both seller and financier. This arrangement allows the dealer to serve a niche market of customers who are usually unable to secure loans from banks. However, it also means taking on more risk because the dealership is responsible for collecting payments.

2. Steps to Start a Buy Here Pay Here Dealership

2.1 Conduct Market Research

The first step to starting any business, including a BHPH dealership, is thorough market research. You need to understand the local market demand, customer demographics, and competition in your area. For California, specifically Southern California, the demand for used cars is high, and there’s a diverse customer base. Research the following:

• Target Customers: Determine who your customers are, their credit situations, and typical price ranges they can afford.
• Competition: Identify existing BHPH dealerships in your area and analyze their strengths and weaknesses.
Pricing and Inventory: Understand the type of cars that sell well and at what price points.

2.2 Develop a Business Plan

A detailed business plan will serve as a roadmap for your dealership. It should outline:

• Business Model: Explain how you plan to buy, sell, and finance vehicles.
• Market Analysis: Include information on target customers and competitors.
• Financial Plan: Detail your projected income, expenses, and break-even analysis.
• Operational Plan: Describe how you will run your day-to-day operations, including sales, collections, and inventory management.

2.3 Register Your Business

Once you have your business plan, you’ll need to register your dealership with the state of California. You’ll need to decide on a business structure, such as a sole proprietorship, partnership, LLC, or corporation. Each has its own advantages and legal implications, so it’s advisable to consult with a business attorney or accountant.

2.4 Obtain Necessary Licenses and Permits

To operate legally as a BHPH dealership in California, you will need several licenses and permits:

• Dealer License: You must obtain a dealer license from the California Department of Motor Vehicles (DMV). The application process includes submitting a completed application form, passing a background check, attending a dealer education program, and passing a test.
• Sales Tax Permit: Register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit, which allows you to collect sales tax from your customers.
• City or County Business License: Ensure you have the proper local business licenses to operate within your city or county.

3. The Application Process for Becoming a BHPH Dealer in California

3.1 Pre-Application Requirements

Before applying for your dealer license, you need to prepare a few things:

• Business Location: You need a business address for your dealership. This should be a place where you can display your inventory, conduct sales, and manage the finance aspects of your business.
• Bond: California requires dealers to have a surety bond, which acts as a security deposit to protect consumers from fraudulent practices. The minimum bond amount is $50,000 if you are selling cars to the retail public.
• Insurance: Acquire business insurance that covers general liability, inventory, and other potential risks.

3.2 Application Submission

Once you’ve met the pre-application requirements, you can proceed with the application:

1. Complete Application Forms: Obtain the dealer application forms (OL 248A) from the California DMV website. You will need to provide information on your business, location, insurance, and bonding.
2. Submit Background Check: The application process includes a background check for all owners, partners, or corporate officers.
3. Attend Dealer Education Program: If this is your first time applying for a dealer license, you’ll need to complete a dealer education program and pass a test administered by the DMV.
4. Pay Fees: Application fees vary but typically include fees for the license, background check, and other associated costs.

3.3 Pass DMV Inspection

The DMV will conduct an inspection of your business location to ensure it meets the requirements. They will check for proper signage, office setup, display area, and compliance with local zoning laws.

3.4 Receive Your License

After successfully completing the application process, passing the inspection, and paying all fees, you will receive your dealer license. At this point, you are legally allowed to operate as a BHPH dealership in California.

4. Best Practices for Running a Successful Buy Here Pay Here Dealership

Being a BHPH dealer comes with its own set of challenges. Below are some best practices to help you run a successful dealership.

4.1 Choose Your Inventory Wisely

The success of your dealership depends largely on your inventory. Focus on purchasing reliable, affordable cars that will appeal to your target market. It’s important to ensure that the vehicles are well-maintained, as this will reduce the risk of customer complaints and returns. Research the models that tend to have lower maintenance costs and are known for reliability.

4.2 Implement a Strong Underwriting Process

Underwriting is the process of assessing the risk of lending to a customer. Since BHPH customers often have poor credit, it’s crucial to have a strong underwriting process that evaluates their ability to make regular payments. Consider factors such as:

• Income Verification: Ensure customers have a stable income source to make payments.
• Credit History: Although you may not use traditional credit scores, reviewing past credit behavior can give insights into a customer’s payment reliability.
• Payment Schedule: Set up a payment schedule that aligns with the customer’s payday to improve payment compliance.

4.3 Maintain Transparency and Compliance

Being transparent with your customers about the terms of the sale and the financing agreement is crucial. Clearly explain interest rates, total loan costs, payment schedules, and late fees. This transparency helps build trust with your customers and reduces the risk of disputes. Additionally, always comply with California’s legal requirements for BHPH dealerships, including truth-in-lending disclosures and fair debt collection practices.

4.4 Invest in Customer Relationship Management

Customer retention is key in the BHPH industry. Since customers will make payments over a long period, maintaining a positive relationship is important. Implement a robust customer relationship management (CRM) system that helps you track customer interactions, payment history, and any potential issues. This will enable you to provide better customer service and address any problems before they escalate.

4.5 Manage Collections Effectively

The BHPH model requires you to manage collections directly. Implement a system that makes it easy for customers to make payments, such as online portals or mobile apps. Be proactive in following up on missed payments, but also be willing to work with customers who are facing financial difficulties. Offering flexible payment options can help reduce defaults.

4.6 Monitor Legal and Regulatory Changes

California has specific laws governing BHPH dealerships, and these regulations can change. For instance, Assembly Bill 1447 imposes requirements on BHPH dealers regarding the use of tracking devices, kill switches, and more. Staying up to date with legal requirements ensures your business remains compliant and avoids costly fines or legal issues.

4.7 Focus on Marketing and Branding

Creating a recognizable brand that emphasizes trust, and reliability can help attract more customers. Use local advertising, social media, and digital marketing to reach your target audience. Highlight your willingness to work with people with poor credit, but also stress that you provide high-quality vehicles and excellent customer service.

Conclusion

Starting a Buy Here Pay Here dealership in California can be a rewarding venture, but it requires careful planning, adherence to regulatory requirements, and a customer-focused approach. By understanding the market, ensuring legal compliance, and implementing best practices, you can build a successful business that meets the needs of customers who might otherwise be unable to purchase a vehicle. As the BHPH market grows, those who can balance profitability with ethical business practices will find success in this niche industry.

By following these guidelines and keeping a close eye on industry trends, you can position your BHPH dealership to thrive in California’s competitive automotive market.

Tags: business, dealer license

Posted in: Education