By Joe Helstrom

When selling relatively expensive water treatment equipment to consumers, a consumer financing option is often necessary to close the sale. Many consumers don’t have the available cash nor do they have available credit on a credit card.

If you offer consumer financing, you likely have a relationship with a local bank or other financial institution, or a large, nationally recognized finance company to whom the customer applies for financing. This is referred to  as “primary financing” relationships. As long as the customer has credit acceptable to your primary financing source, you’ve consummated the sale and are ready to install the equipment.

But what happens if the customer has been rejected by your primary financing source? You have a willing customer and have already invested your organization’s time in making the sale. Should you simply walk away?

Secondary financing source
The answer is an emphatic “no.” In addition to a primary financing source, you should also have a secondary financing source. A secondary financing source will evaluate the credit of those rejected by your primary financing source and buy many of those that were rejected by the primary. While the amount paid to you will be less than what you receive from your primary financing source, using a secondary financing source will greatly improve your financial results.

A secondary financing source will generally fund between 50 and 85 percent of the sale price of the equipment, depending on the credit quality of the customer. The examples below illustrate how this can benefit your business:

Assumed sale price of equipment…………..$5,000
Assumed cost from the manufacturer…    -$2,500
Gross profit……………………………………………2,500

Assume that a secondary financing source is willing to fund 70 percent of the sale price of the equipment. Using that parameter, you would have the following profit scenario:

Cash received from sale………………………….$3,500
                         ($5,000 x .70, or 70 percent)
Cost from manufacturer………………………..-$2,500
Gross profit…………………………………………..$1,000

While this profit margin isn’t as great as the original $2,500 margin, it still adds to your overall profits. It also permits you to keep your installers busy (you’re still paying them even if there’s nothing to install). Additionally, it motivates sales personnel through more closed sales.

To continue this brief financial example, let’s extract a one-day income statement for this assumed transaction under two conditions—a sale financed by a secondary source at 70 percent and no sale at all.

In this example, by using secondary financing you have covered your cost of doing business for the day and made a small profit. If you didn’t make the sale, you’ve lost the amount of your fixed business costs.

Cost of downtime
The use of a secondary financing source makes sense if your business isn’t 100 percent busy. As you can see from the example above, any business downtime is costly. Even if you have sales every day, the use of secondary financing can make your business more profitable by leveraging your organization. Let’s examine an example that compares one sale funded at 100 percent vs. two sales—one at 100 percent and the other at 70 percent.

Here, use of a secondary financing source increases your daily net income by $800 ($2,350 vs. $1,550). If you could increase your sales by one per day and have 250 workdays throughout the year, this translates into an extra $200,000 of annual profit.

Playing fair
A question commonly asked regarding secondary financing concerns the fairness of the discount (the difference between being funded at 100 percent of the sale price as opposed to a lesser amount). This discount is usually tied to the credit quality of the customer and covers anticipated charge-offs from the overall customer pool. By this, it’s meant that different customers will merit different credit risk ratings on whether they’re likely or not to default on the debt based on their credit history, etc. These are generally your B and C credit customers. Keep in mind that these customers have been rejected from your primary financing source, which accept only A credit customers. Therefore, their credit is far from perfect and the secondary financing source will incur a greater percentage of credit losses. The objective, however, is always to limit those losses, which improves the ability of the business to obtain credit for its customers.

The benefits of a secondary financing source are more income, greater leverage of installation staff, more sales over which to spread fixed costs, and a more motivated sales force. There are other benefits as well. Probably the most tangible, additional benefit is the potential for more salt or chemical sales because your equipment will require them. The more units that you have in the field, the greater your potential for ancillary sales. It’s hard to walk away from a willing customer. A secondary financing source allows you to increase your sales in a situation that would otherwise be a lost opportunity.

About the author
Joe Helstrom is the chief financial officer of Carmel Financial Corporation Inc., of Carmel, Ind., a secondary consumer finance company. It provides financing to the water treatment industry on a national basis. Helstrom can be reached at (317) 844-7951 ext. 216, or email: [email protected]


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