In a world where interest rates are skyrocketing, it is more important than ever for dealers to find ways to cut costs, win more customers and most importantly increase profits. One way to do this is by using a Dealer Owned Finance Captive (DOFC).

DOFCs allow dealers to take from profits generated by aftermarket products like vehicle service contracts and GAP and use the tax-advantaged capital to create their own lender to fund their own car deals. This is decentralized auto finance, plain and simple, and through a DOFC, dealers have the power to control their own interest rates and finance products.

Everything from creating your own underwriting guidelines to setting money factors with Leasly’s leasing in a box can be explored through a dealer-owned captive.

Here’s everything you need to know about DOFCs.

Decentralized Finance = Happier Customers

Decentralized auto finance is upon us whether we like it or not. Tesla and BMW accept cryptocurrency for cars; Hyundai is exploring the metaverse; and Nissan is working on NFTs. While a Dealer Owned Finance Captive Model doesn’t implement blockchain technology specifically, it is a giant first step towards decentralized auto at a mainstream level.

With a DOFC you are no longer at the mercy of the banks.

You are in control of your own interest rates, F&I products, and underwriting guidelines. This means you can offer more competitive rates to your customers, win more business and generate greater profits both on the front and back end of your deals. In addition, you can use the profits from aftermarket products to fund your DOFC, which will save you money in the long run.

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Mike Manley, the CEO of AutoNation told Automotive News earlier this year that their next move was to create their own financial captive to create deeper, more nuanced relationships with their customers. In addition, Carmax has its own Captive finance company and it’s now one of the largest in the US.

Provide Customers with Additional Financing Options

One of the benefits of having your own finance captive is that you can offer more financing options to your customers. For example, we provide our dealer “Leasing in a Box” which would give your customers the option to lease a car without going through a traditional captive. This would be a great way to win more business, provide customers with additional financing options and retain your customers through multiple sales cycles.

The customer would make monthly payments to your captive generating interest revenue, and at the end of the term, they would have the option to buy the vehicle for its residual value or return the vehicle and walk away.

Generates More Investment Income and Cash Flow

By taking part in the underwriting profits of a dealer-owned captive, you get to retain that profit through the captive company. Pairing a Dealer Owned Warranty Company (DOWC) with a DOFC takes the profit centers and tax advantages which you traditionally send to your F&I Administrator and Lenders and turns them into capital generators for your dealership. And because the captive is funded by the aftermarket product profits, there is no need for an outside investment although we often increase our client’s funding capacity through a number of facilities.

All of this leads to more cash flow for the dealer which can be used to reinvest in the business or provide additional financing options for customers.

DOFCs also offer tax benefits: Insurance tax law creates immense growth capital, just ask Warren Buffet why he owns Geico. Furthermore, auto lessors benefit from EV tax credits, trade-in tax credits, and fleet depreciation.

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The Future is Now

In a matter of weeks interest payments have gone from averaging 2.5% to the high 5%s. This might scare many into starting their own captive, but as the old saying goes “millionaires are made in recessions.”

Customers are looking for dealerships that have an edge that can provide them with the best financing options. Today’s customer is the most knowledgeable and educated consumer than ever before.

A DOFC is that edge, and now is the time to start your own.

So, there you have it, everything you need to know about why dealers need a DOFC to win more customers and gain new leads. If you’re thinking about starting your own captive, be sure to follow the steps outlined in this blog post and you’ll be on your way to success. Thanks for reading!