25505 W. Twelve Mile Road
Credit Acceptance Corporation is a pioneer provider of a range of credit financing services to automobile dealers selling used automobiles to consumers considered high credit risks. Such consumers typically lack access to traditional sources of credit and automobile financing. Services provided to dealers by Credit Acceptance include funding, receivables management, collection, sales training, and other products and services. In September 1996, Credit Acceptance held more than $920 million in installment contracts receivables, an increase of more than $300 million over the previous year. Credit Acceptance's network of participating dealers has been growing quickly as well, nearly doubling in 1996 to almost 5,000 dealers. Credit Acceptance works with dealers in 49 states as well as in the United Kingdom, which accounted for approximately 16 percent of participating dealers in 1995. During 1996, Credit Acceptance also received the necessary licenses to expand its operations into Canada. The company has seen strong growth since going public in 1992, increasing revenues from $18.7 million to $85.1 million in 1995. The company's profits have also been strong: net income for 1995 was more than $29.5 million. Credit Acceptance holds about two percent of the highly fragmented used automobile financing market, which has been estimated at more than $100 billion per year in the mid-1990s. Credit Acceptance is led by chairman, CEO, and founder Donald A. Foss, who controls approximately 52 percent of the company's stock.
A Credit Pioneer in the 1970s
Don Foss, named to the Forbes list of the 400 wealthiest Michigan residents in 1996, graduated from Detroit High School in 1964. By 1967, Foss had opened his first used car lot. As was customary among used car dealers, Foss offered his customers financing on a 'buy-here, pay-here' basis. Despite the credit risk of many of his customers, Foss would often use personal funds in order to finance--and stimulate--automobile purchases. Foss quickly added more used car dealerships, each arranging its own financing with customers. In 1972, however, Foss decided to consolidate his financing services under one company, which he called Credit Acceptance Corporation. "The credit business was started over his compassion for people," a former Foss employee told the Detroit News. "He knew that if he could help enough people get what they wanted, he could get what he wanted."
For the next decade, Credit Acceptance existed primarily to provide financing for customers of Foss's dealerships. By 1986, however, Credit Acceptance began offering its services to used car dealers outside the company. The company also began attracting new car dealers eager to stimulate sales. Almost all of these dealerships were located in the Detroit area.
In 1988 Credit Acceptance began to expand the company's dealer base. Over the next four years the company doubled the number of dealers using Credit Acceptance services. This aggressive expansion was stimulated in two ways. The first was by instituting a sales and marketing division within Credit Acceptance that could attract new dealers while providing sales and training support to existing dealers. The second move was the incorporation of the company's Advance program as a supplement to the receivables management and collection services already offered by Credit Acceptance.
Under the Advance program, dealers were provided cash advances on car sales financed through Credit Acceptance. When the dealer sold a used vehicle, he received a cash down payment from the customer. A down payment typically represented 25 percent of the vehicle's purchase price. The dealer then assigned the purchase contract to Credit Acceptance, and Credit Acceptance paid the dealer a cash advance averaging 50 percent of the purchase value. The average loan was for $6,000. Credit Acceptance took over all of the collection risk from the dealer, overseeing collection on the account. Payments would go first toward paying the company's servicing fees and reimbursing the company's collection costs, which averaged 20 percent of the total contract amount, then toward recovering the cash advance. Once the cash advance was fully recovered, the dealer received the balance of the payments. In order to minimize risk to both the dealer and the company, Credit Acceptance purchased the vehicle financing contracts in blocks of 100. The dealer would receive the balance due once Credit Acceptance had been reimbursed for its cash advances, servicing fees, and collection costs on all of the 100 contracts in the block. The dealer's balance also included interest on the contract: interest rates were set by the dealer, and usually represented the maximum allowable rate for the dealer's state. Apart from the advance, dealers generally would see no cash on the purchase for the initial 19 to 21 months of the contracts. Contracts usually had a 36-month life.
The Advance program proved attractive to all of the parties involved in used vehicle purchases. The dealers saw a positive cash flow and were able to sell more vehicles, especially older model cars, as Credit Acceptance generally approved more than 90 percent of used vehicle financing contracts. Credit Acceptance also generated higher profits for dealers than other high-risk lenders. Customers also benefitted. The high approval rate put more customers with little credit or a damaged credit rating behind the wheel of a car. Paying off the finance contract also provided the customer with a means to establish or repair his or her credit rating.
Dealers flocked to the new Credit Acceptance plan. The number of used car dealers arranging financing through Credit Acceptance more than doubled in four years, and the number of new car dealers working with the company also grew. Business was boosted by improvements in U.S. automobile design and manufacturing, as better-built automobiles proved more durable and more attractive to consumers buying second-hand. The economic slowdown of the late 1980s and early 1990s also spurred sales of used automobiles over new automobiles. At the same time, staggering rises during the 1980s in the prices of new automobiles stimulated the used auto market. As families struggled with the effects of the recession, the Gulf War, and the wave of downsizing sweeping corporate America, the cost of new automobiles jumped from about 36 percent of a family's annual income in 1980 to 46 percent in 1990. Credit Acceptance's high acceptance rate of financing applications was another factor attracting dealers to the company.
Public in the 1990s
In the early 1990s, Credit Acceptance was the sole central lender in the high-risk financing market. Even after the company was joined by a growing list of competitors, the market remained highly fragmented, with enormous potential for growth. Credit Acceptance quickly expanded across the continental United States, gaining licenses in 46 states by 1992. The company's dealer network grew rapidly, to 394 dealers in 1991, then nearly doubled in one year to 750 in 1992. The company's accounts receivable assets climbed from just $7 million in 1990 to more than $70 million in 1991. Revenues, the majority of which were generated by finance charges, passed $12 million for 1991. Net income on this revenue passed $5 million for the year. Credit Acceptance next prepared to expand even more aggressively in the high-risk lending market.
In order to fuel further growth, Foss took Credit Acceptance public in June 1992, selling 2.3 million shares and raising $27 million. The initial selling price was $12 per share. The company stepped up recruitment of new dealers and added new services to increase the company's attractiveness to both dealers and their customers. Among the new services Credit Acceptance offered were credit life and disability insurance and dual interest collateral protection programs offered through the company by third-party insurers. The company also set up a subsidiary offering vehicle service contracts through the dealers. Dealers were also offered floor plan financing and working capital loans. While vehicle financing remained the company's most important source of revenue, these new programs helped boost the company's dealer base to nearly 1,100 in 1993 and to more than 1,500 in 1994. The company's total assets from its financing contracts and other receivables climbed from $128 million in 1992 to $203 million in 1993. Revenues rose from $16 million to $25.7 million, while net income passed $12 million in 1993.
The company's stock split 2-for-1 by March 1993. By November of that year, Credit Acceptance's stock was selling for $40 per share. A second stock split, of 3-for-2, following in December 1993. The number of new-car dealers in Credit Acceptance's dealer base had risen to more than 50 percent, as new-car dealers expanded their used vehicle sales. "We take the risk out of financing for dealers," Foss told Automotive News, "We allow dealers to get into the business of financing older cars and later-model cars as well." By 1994, Credit Acceptance counted nearly 650 new-car dealers in its dealer base.
In 1994 the company also added a new program to increase its attractiveness to dealers. The program, called the Credit Acceptance Corp. Stock Option Plan for dealers, granted dealers the option to buy 1,000 shares of Credit Acceptance stock after they set up 100 automobile financing contracts with the company. Every additional 100 contracts gave the dealer an option to buy 100 more shares of company stock. Credit Acceptance registered 500,000 new shares for the program. As one analyst told Crain's Detroit Business, "I think it's a good way to build up a base of loyal customers and business friends. If the dealers exercise the option and hold the stock, they may say, 'Hey, I'm a stockholder in Credit Acceptance Corp.; maybe I'd better send them all the business I can."'
Credit Acceptance next moved to enter the international market, setting up a subsidiary in the United Kingdom. Despite first-year losses, the company's U.K. subsidiary soon proved profitable, and the U.K. dealers quickly grew to represent a significant portion of the company's total dealer base, which more than doubled, from over 1,500 in 1994 to more than 3,300 in 1995. A key factor in the company's growth was its growing sales and marketing force. In 1990 the company had just two sales representatives. By 1995, the company had nearly 70 sales representatives and sales agents.
Credit Acceptance made a second public offering in September 1995, offering 5.5 million shares for a total price of nearly $135 million. By the end of that year, the company's receivables and other assets had climbed to $686 million, producing revenue of $85 million, and net income of nearly $30 million. By the company's third quarter the following year, its receivables approached $1 billion.
Despite Credit Acceptance's steady growth during the 1990s, the high-risk auto financing market remained largely untapped. Credit Acceptance, while still the largest in the high-risk market, was estimated to hold only about two percent of the market. In 1996 Credit Acceptance continued plans for international expansion when it secured the licenses to expand operations into Canada. By then, Foss, who still owned 12 Detroit-area dealerships, was worth more than $500 million on paper. And analysts agreed that Foss's and Credit Acceptance's background in used car sales gave it the edge in the booming high-risk financing market.
Principal Subsidiaries: Credit Acceptance Corporation Life Insurance Company; Buyers Vehicle Protection Plan, Inc.; Credit Acceptance Property and Casualty Agency, Inc.; Credit Acceptance Corporation UK, Ltd. (United Kingdom).
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