By Phil Layher
Adeclining economy, corporate financial scandals and the advent of worldwide terrorism all contributed to a significantly tighter consumer credit market for water treatment dealers over the last couple of years. Major finance companies began to exit the in-home sales market during this time, leaving water treatment dealers with mostly local and regional sources for consumer purchases. Only recently have we seen a slight rebound in available options. All this means that dealers must be even more creative in sourcing financing options for their customers.
Keeping your options open
Dealers need to develop multiple sources of financing in this tighter credit market. Your sources should be able to accommodate not only “prime” customers that are easy to finance, but “sub-prime” applicants as well. Sub-prime or secondary lenders allow you to expand your sales opportunities and increase the number of installs. Secondary lenders typically charge a discount fee to make up for the additional risk of lending to consumers with spotty credit records. However, with high margin sales, a dealer can still earn a profit while reducing the overall cost of these sub-prime sales by spreading the expenses over a larger revenue base.
Dealers should identify a primary source for prime credit with a reliable, consistent source. This source should be able to provide you with a market-competitive program in terms of consumer APR, monthly payments, credit promotion options, prompt credit decision turnaround and next-day funding. A good prime source should provide you a 40-50 percent approval rate depending on your geographic market and the quality of your list source. This still leaves approximately half of your sales in need of financing, and that’s where the secondary sources come into play. Most dealers can increase their total approval rate to 70-80 percent at an acceptable discount rate that will still allow for a profitable sale.
Choosing the right secondary source
Identifying the best secondary source is more difficult than finding the best prime source. Most primary lenders offer some level of sub-prime financing; however, it is not necessarily a benefit to choose the lender that buys the deepest due to the numerous secondary sources that can offer better discounts on sub-prime business. It is often advantageous to develop a combination of primary and secondary sources that can work together as each lender can best serve its primary credit profile and provide you a total combination that is more powerful than any single lender attempting to serve both markets.
Your goal is to identify a secondary source that is compatible with your primary source to ensure the maximum opportunity to complete installs on the sales you have already made. Sub-prime lending is more subjective and many times secondary lenders will offer significantly different discounts on the same customers. The discount offered is certainly important, however, there are other questions that should be asked to determine the best source for your particular situation.
How quickly will you get funded for a completed sale? Many secondary lenders will make verification calls to customers prior to funding. This verification process can add a week or more to the funding process and have a significant impact on your cash flow.
Does the secondary lender offer the same terms as your primary lender? If your primary lender offers a low minimum monthly payment and your secondary lender does not offer the same terms, you may be faced with telling your customer that they will have a higher monthly payment or APR than originally quoted. This can lead to more cancellations.
Does the secondary lender accept your primary lender’s credit documents? Again, a return trip to the customer’s home with new credit documents to sign may create more cancellations on the part of the customer.
Is there any recourse or other conditions on the sale that add to your risk? Some secondary lenders maintain one payment or full recourse for riskier customers. These lenders are passing on this additional risk to the dealer when they are the ones best suited to calculate this risk. The cost of one recourse buyback can potentially wipe out the profit of several sales and come when you least expect it, once again creating cash flow problems for your dealership. For this reason recourse type programs should be avoided whernever possible unless you have sufficient knowledge to assess this risk and sufficient capital to offset the buybacks.
A good source for identifying strong secondary lenders is your primary lender. They will be aware of secondary lenders participating in the industry and have access to feedback about these secondary sources. They may even have a direct referral program with one or more of the secondary lenders. Once you have evaluated these factors and selected your primary and secondary lender, you can establish your optimal financing process.
Creating the optimal financing process
The optimal financing process should be one that allows you to spend a minimal amount of time in getting your customers approved, freeing up more time for selling and running your dealership. It should offer a seamless application process flow, maximize your credit approvals, limit your exposure to buybacks, maximize cash flow on funding and provide maximum marketability to customers.
A seamless process flow ensures that applications declined by one financing source are quickly submitted to others for review. The goal here is to quickly ascertain which sales can be installed to minimize the amount of time and energy expended on those customers that will not qualify for financing. Your primary finance company should offer you a quick and easy application review process. An on-line, web-based or fax application processing method will allow you to obtain the quickest credit decisions and schedule an install for approved customers. It will also immediately determine which customers need be submitted to a secondary lender.
As most secondary lenders have very different credit criteria, some dealers have resorted to pulling a credit bureau report to determine which financing source to utilize for a particular sale. This can be a costly and time consuming process. Look for a primary lender that offers an automated referral process to ensure your preferred secondary lender receives the declined applications as quickly as possible creating a “virtual credit manager”. Credit decisions from secondary lenders are typically faster through this direct referral process and if you receive an approval at an acceptable discount rate, you can schedule these customers for installation as well. Many dealers have created an environment where they receive a ‘first look’ approval rate in the 70-75 percent range, allowing them to avoid unnecessary credit bureau charges and focus strictly on those difficult-to-finance customers. Once you have completed this ‘first look’ review process, you can then pull a credit bureau report to determine if there is any possibility of financing these customers through alternate sources.
Do not completely discard customers that do not qualify for financing. They can always become cash buyers. Determine what your maximum acceptable discount rate is and then offer those customers a cash discount to complete the sale by arranging their own financing or simply in paying cash.
Determining an acceptable discount
A key factor in developing the optimal financing process is determining an acceptable discount. What is the value of quickly completing a sale in relation to a lower discount fee from a secondary lender? This decision varies by dealer depending on your product margin, tolerance for risk and available time to pursue other financing options.
Generally, you should strive to fund as many sales as possible through your primary lending source. Most sales approved by your primary lender should be at no discount; however, since most secondary lenders charge a minimum discount of ten percent or more, even sales that are approved at a discount are best funded through your primary lender. Your primary lender typically offers you non-recourse sales, the best consumer terms and the quickest funding. All of these factors outweigh the risks of recourse, customer cancellation due to new credit terms or a slowdown in cash flow created by converting a customer to a new credit provider.
Determining an acceptable discount from a secondary lender can be more subjective. If you have a secondary lender that accepts your primary lender’s paperwork and does not require that you change the consumer terms, this can be more valuable than saving a couple of points on the discount due to the risk of cancellation by the customer. You should also consider the amount of risk and the average funding time for these secondary lenders. You may find that prompt, reliable funding with no recourse is worth more than the discount savings. Normally, finding a reliable secondary lender that delivers the best service and funding turnaround can be worth as much as five percent on the discount charged when you factor in the cost of your time in returning to the customer’s home, following up on funding and managing the financing process. In addition, you should consider any ancillary fees that may apply, such as application fees, forms fees, reserve holdbacks or the cost for direct deposit funding.
There is more to maximizing your profits than simply looking for the lowest discount rate on your financed sales. A reliable financing source that will provide you with a competitive marketable program, consistent credit decisions, easy access to alternate financing sources and prompt funding cash flow is an imperative for your business. Adding a compatible secondary lender and consistently applying the optimal financing process is your key to a successful consumer finance program.
About the author
Phil Layher is the President of American Finco Financial Services, LLC of Schaum-burg, IL, which provides consumer financing to the home improvement industry. Prior to joining American Finco, Mr. Layher spent more than 15 years in the consumer finance industry with Household Retail Services, Associates Commerce Solutions and Citicorp. He can be reached at (847) 240-4299 or via email: email@example.com.