Deciding whether to offer financing can be a big decision. In the first part of this series (October 2004), we reviewed open-end credit and direct closed-end credit. This month we'll discuss perhaps the most common form of financing a home remodeling sale: indirect closed-end credit.

Here, the contractor is selling goods and services on credit, through the use of a credit sale or “retail installment” contract. The contractor will take a credit application from the consumer and may complete financing paperwork at the same time, usually in the form of a retail installment contract. In other instances, the contractor may return to the home at a later date to complete the retail installment contract. This is sometimes considered “indirect” financing because it's the contractor that's listed as the creditor on the retail installment contract, not the finance company.

Some contractors will, in fact, act as a true creditor, analyzing the consumer's application and deciding terms. The contractor may then collect the finance payments, sell the retail installment contract as a separate receivable, or package many such contracts together and sell them as a portfolio.

It's more common, however, for the contractor to have little or no participation as a true creditor in the retail installment sale. In most instances, the contractor has established relationships with one or more third-party investors, usually finance companies or banks. These investors act as the actual funding creditor in many credit sales. The investor will dictate the precise terms — such as the security and interest rate —based on the consumer's credit and the amount of the credit sale. By obtaining this preconditional approval, the contractor may then proceed with the credit sale, knowing that if the investor's conditions are met, the contractor will be able to assign the retail installment contract to the investor after the job's been satisfactorily completed. This allows the contractor to stay out of the financing/collection business but still offer financing. —D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (, a national law firm specializing in the home improvement industry. Contact him at 703.759.1055 or

This article is for informational purposes only and should not be construed as legal advice.