Short-Term Note Program Gaining Ground with Dealers

Cars_in_port_featureDavid Braeger, the Milwaukee-area entrepreneur who brought crowdfunding to the auto finance market two years ago, has come up with a new idea that he says makes it easier and cheaper for independent used-car dealerships to finance their inventories and their internal operations.

Braeger’s newest innovation is a short-term note program that he says not only cuts dealers’ financing costs in half but also reduces the pressure on them to sell cars as quickly as possible, often at a loss — plus it provides a pretty good return for investors.

Braeger – chief executive of Glendale, Wis.-based Braeger Financial Group — said the new short-term note program has met with such enthusiasm from dealers that he has largely abandoned the crowdfunding platform, which had “monstrous” regulations and associated costs.

The short-term notes come in 15-, 20-, and 30-month maturities — annually paying 8%, 9%, and 10% respectively. The beauty of the program, Braeger says, is its simplicity. Using the 15-month notes as an example, dealers pay 1/15 of the principal, plus interest, each month, which is then paid back to the note holders.

While those rates sound high, Braeger said it’s a lot cheaper than borrowing from an auto finance company, which typically charge higher rates as well as steep fees that accrue the longer vehicles remain unsold on the dealer’s lot. Generally, finance companies have been independent dealers’ only option, he added.

Using his note program, dealers can cut their financing costs in half, Braeger maintains, as well as remove the pressure on them to get their cars off the lot as quickly as possible in order to avoid even more fees.

“The dealer only has to worry about paying the interest plus a percentage of the principal each month,” he said.

Dusty Jackson, president and chief executive of AutoStart, a Kansas City-based dealership with operations in four states, said traditional finance companies charge between 9% and 15% interest on financing, but once the fees are factored in, the cost could be as much as three times that. In addition, the pressure to sell cars in order to avoid the fees often forces dealers to sell cars at a loss. Using Braeger Financial’s short-term notes, he doesn’t have to do that.

Both Braeger and Jackson said the biggest problem with the short-term note program isn’t insufficient demand from dealers, but finding enough investors to provide the capital. Braeger currently does note advertise the program.

Noteholders are protected by the dealers’ vehicle portfolio, which can be sold to pay the notes, plus Braeger does “significant due diligence to ensure they have a strong balance sheet, significantly low default rates, and a strong valuation on their current loan portfolio,” he said.

While the short-term note program is still largely in its infancy, Braeger already has his sights on solving another problem for used-car dealers, namely financing vehicle service contracts. Those “back-end” contracts are “incredibly lucrative” to the dealers’ F&I departments, he said, but most banks and credit unions won’t finance them because of their small size and the average age of the vehicles. Braeger is currently working with an insurance company to try to put the program together.

“We try to make things as simple as possible for the dealer, and that in turn will make it cheaper for the consumer,” Braeger said. “We want to make the auto buying experience enjoyable from the dealer down to the consumer.”

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