I've been trying to Google this question but I'm not getting clear answers. Maybe somebody here has some insight.
Ok, so virtually all depository institutions in the United States--commercial banks, S&Ls, etc.--are FDIC insured, by law I think. My buddy has a car dealership--several actually--and I'm interested in starting a depository institution that solely buys the paper on his used car loans. The loan transactions would be about $2 million per year.
Of course, the problem in the United States is that it's very difficult to start a real, actual bank--requires tens of millions of dollars in capital, board members with extensive experience, and a detailed business plan and model, all for the purpose of sucking the proverbial dick of our federal bureaucrat overlords (who know as much about business as a child). Also, as we've seen in the news recently, insured depository institutions can't be too heavily invested in one loan transaction area.
My question is, are there non-FDIC alternatives for starting U.S.-based depository institutions? If not, does a non-FDIC insured online bank have to operate physically outside of the United States? Any insight here?
(Maybe I'll ask the guys over on JDOasis, too.)
So are you actually looking to take deposits, like savings accounts?
I'd structure it more like an investment fund - get investors (or LPs) and use that capital to buy the notes. Maybe you take 10% of profits as a management fee.
I definitely like where your head is at. This is an interesting idea and I'm curious to see if you get any responses.
Yeah, I was thinking more along the lines of CDs (looking to avoid overhead of making checkbooks, integrating into ATMs, etc.). 3-month to 3-year terms. I'd assume non-FDIC insured institutions would offer higher rates (say, 3% in today's market) but limit to $10,000 per CD as a form of protection to the depositor. Prepayment penalties on loans.
I initially thought about the outside investors, but prevailing rates on used car loans are 5-8%. Not really worth the risk for most investors at such paltry returns. But a 2-5% spread on deposits ain't too bad with title held and repossessions going right back onto the partner's lots.
How do you intend to handle cash?
If you are starting a financing company that is completely different and very easy to do.
Hey VT, what kind of dealerships does your buddy have? ARe they "tote the note" dealerships? I assumed that because of you wanting to buy the notes. I have a very close family member in a similar dealership and I've been looking to invest/expand on theirs.
Not exactly sure what 'tote the note' means--maybe I should--but they do cash sales and finance. Decent cars--$4-10k. They don't hold the note--they issue the loan and sell the paper the next day to the willing buyer.
That's a tote the note dealer, with the exception that he sells the note. This is a good thread, lets keep it going.
Have you thought about how you'll match the cash inflows with loan purchases? Similar to factoring receivables for a corporation. If I give you $10k I expect to be getting interest on Day 1, but if you don't put that cash to use for a few months that interest payment is coming out of your pocket.
Also, you better have a fucking amazing estimate on bad debt. It sounds like you'd be taking the bad debt risk and hiring the repo men to go chase after the late payers.
There's no basis to this, but I personally wouldn't call the investment CDs. I'd call it some sort of 5 year investment and pay out 4-5% interest.
In my mind you challenges would be (in this order): - figure out how to do it legally - diversify and minimize bad debt - get investments
Good points. The guy is already issuing $150,000 per month in auto paper to local financial institutions. Paper is sold the next day. I'd be basing loan default estimates on his historical performance. Correct on the repo men.
I like the idea of calling it something else besides CD. Good idea. I'd be an unrated bond. Junk? Haha.
Yeah, but a finance company needs a cash infusion from investors. I have several hundred grand of my own money, but it's insufficient for the transaction pace. I just don't think a 26-year-old real estate veteran is going to have the sufficient "gravitas" to pull another $2 million from savvy investors for an auto finance company. My own mother, a millionaire several times over, won't even give me the time of day for investments where I'm an expert.
That's why I was leaning toward depository institutions, but that's where I hit the wall with FDIC insurance being a requirement.
Hmm, wait, it's an asset-back security. Can't be that bad of a rating, right?
The person I know in this field has a 30+% repo statistic and another 5-10% or so wreck or ruin the car and never pay for it. You need to find out how your buddy checks their credit and how good of a check he does.
Well, to clarify, the dealer doesn't issue any cash to the borrower. Simply places them in a loan and then gets cash from the depository institutions the next day (I think you understood that--just clarifying). My buddy showed me how they make additional money on the note--something like $200 to $300 per. Plus they sell a $1,200 warranty to about 30% of buyers--they make $600 per warranty sold. Plus that make around $1,500 per car sold. It's amazing how much money used car dealers make. The spreads are astronomical.
Damn. 40% default rate? Christ almighty! If that's the case I'd be issue debt in the 8% range. Repo isn't a big deal but wreck and ruin of 10%. That's a big deal.
This may be a totally different kind of dealer though. The dealer I'm talking about specialized in $4-10K range and dealt with people with little to no credit. The dealer self financed and held the notes. The notes were usually in the 1-2 year range.
Yeah, this guy is 580+ credit score (I think--maybe 620) plus a job or co-signer. I don't think the job is verified, but I think they have to sign an affidafit or something attesting to the accuracy under penalty of perjury or something.
It is pretty amazing. I am actually highly considering getting into it. I did it for a while, but moved on. It is work and does have significant risks, but the payout can be large.
Thanks for the clarification, definitely helped.
Yeah, it's a ridiculous business--like, I'd be embarrassed to tell someone that I owned a used car dealership, but they may ridiculous money. It's a complicated and intricate business.
The solution I see on the wreck and ruin rate would be required gap insurance on financed cars. Don't know how prohibitive that would be on sub-$10 used cars. Probably varies by credit.
Your imagination is inspiring, but in terms of CDs, you are SOL. The primary pull in CDs is their insurance feature and death puts which make them attractive to elderly investors looking to have stability. If you are looking to distribute these things widely, you would need to issue brokered CDs as I cant imagine that you would be able to sell millions of dollars worth of branch CDs based on the underlying business. Banks will typically issue new brokered CD debt in lots of $1mil+, and that is on the low end of things, with larger banks issuing CDs in multiple terms at $20mil+ a term. The fact that you would not be insured by the FDIC (if it is even possible with CDs), would theoretically use the deposits to invest in risky used car loans, and have no credit history (much less liquidity) whatsoever linked to this 'company' would mean that you would essentially be getting nothing in terms of spreads because of the astronomical rates you would have to pay the ignoramuses that would want to invest in these things.
Also, as an aside, attempting to limit the amount that one can put in does absolutely nothing to limit riskiness.
Yeah, these are good points. In terms of limiting the amount, it would just ensure that people aren't putting significant assets in a risky investment. $10k might be 100% of someone's net worth or assets, but it's easier to recover from losing $10k than $100k. I couldn't sleep at night if I did that to someone (which is why I have an 810 credit score...haha).
Are you friendly enough with this guy to have him let you cherry pick your choice of notes? Tell him once you build a business you'll start getting him favorable rates. You'll have literally no overhead and should have no issue undercutting his other lenders by .25%. If you ever got large enough that would be a win-win.
If he'd let you cherry pick, start slow and build a track record. Start with $100k of your own (if your comfortable) and start seeking investments slowly. After a year or two with a little bit of a track record you should be able to start getting more investments.
As a total side note - how's the entrepreneur/consulting gig going?
accountingbyday, that's a very interesting idea. Not half bad at all. Take the 750 credit scores with good jobs and steady employment. Take a few dozen of those to start with, prove my salt. I like it.
It's going very well. Launching my SEO-enriched website in a few weeks. Spent about $5k on it. Hired a consultant who is booking me dozens of speaking gigs over the next 7 months. Things are going really well, by the grace of God.
You really need to get a feel of what your friends business model is. Most dealers that sell lower priced autos specialize in no to bad credit customers. Seriously, do you think someone with a 700+ credit score is gonna buy a $5k car and finance it? Not likely. It can be very lucrative, but make no mistake, it's very risky. I was in the business for 2 years and plan on getting back in eventually.
you're talking more about specialty finance and securitizing his auto loans so he can lend it out and sell more cars? Even captive finance is an inherently unattractive business. I'd think for the cost and amount of debt you'd need you could find a much more attractive option...
I would almost think that you could get to the point where you could just say "I'll beat Finance Company X that you typically use by .25% on all verified incomes over $40k and credit scores over 620". If you're comfortable with Finance Company X, you are basically leveraging their analysis and track record for your gain.
That's awesome that things are going well for you, I'd like to see the website when completed.
Any engagements booked in the Chicago area?
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