New Model Gives Indie Dealers Greater Leverage

One of the biggest problems independent auto dealers have is getting financing to run their credit operations. Now, a Milwaukee-area entrepreneur with a long auto sales pedigree has come up with a way to help dealers raise more money, and lower their financing costs while allowing a new group of investors to get into the auto finance business.

“For the first time in history that we know of, individual investors have the ability to take part in the auto finance industry,” says David Braeger, CEO of Braeger Auto Finance Group in Glendale, WI, outside Milwaukee. “It’s historically been closed to everyone except hedge funds, credit unions and banks. One of our clients said, ‘This is the most creative financing model since the invention of the automobile.’”

Through his company’s website or Vroombank.com, individual investors can buy three, four, or five-year notes earning 7%, 8%, or 9% respectively, with interest payable quarterly. The notes are sold in minimum amounts of $25,000.

The proceeds from the notes are used not to make direct-to-consumer auto loans, but instead to provide capital to independent dealers who sell cars and provide the financing. Most of the loans are to subprime customers.

For now, only “accredited investors,” meaning those with annual income of $200,000 ($300,000 for a couple) or more than $1 million in net assets, are eligible. However, the market for these notes may be widened to the general public before the end of the year, pending Securities and Exchange Commission approval. Until recently, the company was prevented from advertising, relying on referrals and a handful of articles in the local Milwaukee or automotive press.

Braeger’s financing model was made possible by the Jumpstart Our Business Startups,or JOBS, Act of 2011, which was intended to encourage “crowdfunding” of small businesses.

Before that, Braeger says, independent auto dealers who made their own loans to customers often went to commercial banks for money with little success. “The banks are not lending to credit facilities of independent auto dealerships,” he says.

“But once we give [the dealers] the money, it changes the whole conversation. Dealers use our money to get traditional financing,” often three to five times the amount they borrow from Braeger’s investors.

“That’s the value to the dealer,” he says. “Our money is expensive, but the dealership can then use that to get a bigger [and less expensive] credit facility from the bank.”

One of Braeger’s dealer clients, Drive Away Auto in Houston, says it was able to increase its credit facility to close to $38 million from $3 million by leveraging the proceeds from the note funding.

Braeger Auto Finance currently has nine dealership clients and supports $45 million in credit facilities.

The notes are not FDIC insured, and Vroombank’s website warns investors they could “lose all or part” of their investment.

However, Braeger says, “We are confident that our money is protected. We have two assets. One, the car. If the borrower can’t pay, the dealership repos the car. Two, the credit facility. We can call on that and the dealer has to give us our money back within 60 days. We also have a 26% cushion between what we pay out to investors and what we charge dealerships. So we’d have to be 26% wrong for investors not to receive their interest payments. If that happened we’d have to be in a Depression, not a Great Recession.”

“We’ve never had a default, we’ve never had a late payment,” he adds.

Braeger has auto sales in his blood. His paternal grandfather started Braeger Automotive Group in Milwaukee in 1923. Braeger Auto Finance is not related to the Braeger dealerships.

He says he vets each dealership thoroughly and only deals with those who treat customers ethically and sell vehicles at a fair price. He prefers dealerships in warm weather areas, where sales are not at the mercy of extreme weather, although he’s not restricted to them.

In business just over a year, Braeger says his company has passed the startup stage and is now “in full growth mode.”