In the world of car dealerships, the saying "time kills deals" has never been more true. In a recent article by Brian Kramer, he dives into the financial pressures from holding costs – or the expenses that come with keeping cars on the lot too long – and how these can hurt dealerships’ profits.¹

For dealerships with lots of inventory, cutting these costs by selling more cars faster and more profitably isn’t just helpful; it’s necessary.

 

Understanding Holding Costs

Kramer explained that holding costs, or carrying costs, are the expenses tied to keeping inventory. Over time, these costs can pile up, roughly equalling $679 per day or close to $70,000 in monthly holding costs for a dealership with a 100-unit inventory.² These costs factor in vehicle depreciation, insurance, rent and storage costs and other things like ongoing maintenance and opportunity costs. 

 

The Challenge with Traditional Financing

Currently, dealers face challenges in finding buyers who meet strict credit and loan-to-value (LTV) criteria from lenders. This often leads to longer periods of holding inventory as dealers wait for car shoppers who meet traditional financing guidelines. Many lenders focus heavily on the collateral and less on the ability of the borrower to repay the loan, resulting in more turndowns or unfavorable deals. This approach often causes inventory to sit longer, increasing holding costs and putting pressure on dealership profitability.

 

Shifting Focus: Prioritizing Borrower Approval

By shifting the primary focus from the collateral value to individual, risk-based approval and the ability of that borrower to repay the car loan, dealerships can connect with a broader range of creditworthy car buyers, addressing affordability issues and reducing holding times. This strategy empowers dealers by expanding their customer base and speeding up inventory turnover. Instead of relying solely on collateral-based loans, which restricts the pool of potential buyers, focusing more on the borrower’s ability to repay allows dealers to better align their offerings with their customers’ needs. 

 

Starting with the Consumer Experience: The Path to Profitability and Faster Sales 

To handle the added financial pressures of holding costs, dealerships can use digital tools that speed up the sales process and boost profitability and sales. Digital retailing solutions that allow consumers to shop deals, value trade-ins, add accessories and submit their credit application on their dealer website—and seamlessly transition this information to the showroom experience—   enable better inventory management and faster sales. This reduces the time cars spend in inventory and allows for continual reinvestment in new stock.

Connecting the online and in-store buying experiences lets customers move smoothly from browsing online to dealing and closing the deal in the showroom. This cuts down on repetitive data entry for sales associates, saving valuable time. A unified approach can reduce wait times by up to 90 minutes, helping salespeople sell more cars.³ In fact, salespeople at Ron Bouchard Auto Stores each sell 4-5 more cars per month thanks to connected retailing.⁴ 

 

The Role of AI in Better Financing

Integrating AI enhances this approach by helping dealers match their inventory with a larger and more diverse group of potential buyers. AI-powered financing can speed up the approval process by providing better financing terms for more car shoppers for more deals, leading to 30 percent higher back-end gross profits per vehicle compared to traditional lenders for North Orlando CARite.⁵ A larger ‘net’ with more qualified buyers will reduce the time vehicles spend on the lot and cut down overall holding costs. 

 

Moving Metal Quickly and Profitably

In car sales, time really can kill deals, and hidden holding costs can eat into profits and slow growth. With today's high interest rates adding more financial pressure, dealers need to find ways to sell cars quickly and profitably to offset these costs. By adopting connected digital retailing and AI-powered financing solutions, dealers can shorten their sales cycles and boost their bottom line in today’s market. By focusing more on the borrower’s ability to repay, dealerships can expand their customer base, speed up inventory turnover and reduce holding costs, ultimately driving greater sales and profitability. 

 

References:

1.https://www.linkedin.com/pulse/cost-doing-business-brian-kramer-5j8ee/

2. Ibid.

3. https://www.upstart.com/dealers/case-studies/leif-johnson-ford-success-story/

4. https://goauto.upstart.com/ron-bouchard-case-study

5.  Findings reported are based on information collected by CARite and reported to Upstart from April 20-June 20, 2024. The overall back-end average includes all deals, including cash.