Does offering financing make a remodeler into a mortgage broker or a bank? Is there any investment risk? Lenders and remodelers answer these and other questions that are commonly asked by contractors contemplating offering financing. The list is not comprehensive, but it covers the essentials of what to expect when adding a financing option to your business.
Q: Why offer financing?
A: To sell more jobs — and at higher prices.
Some remodelers begin offering financing after seeing too many potential projects killed when the homeowners get frustrated waiting to find out if they would be approved for a loan. “Fast credit decisions are critical to the success of [any] consumer financing program,” says Paul Jones, vice president of operations at Wells Fargo Financial Retail Services. “For a remodeler, a delayed credit decision could mean the difference between winning or losing a job.”
Remodelers who offer financing also tend to get more lucrative projects. A homeowner is likely to spend more on a project that can be financed, for the simple reason that the cost can be spread out over time. That's why remodelers who are successful selling financing tend to talk in terms of monthly payments. “It's easier for the customer to swallow a $695 per month payment than a $200,000 nut,” says Bob Kocis of LIRemodel.com in Huntington Station, N.Y. The payment increase on an extra few thousand dollars may be comparable to what an affluent customer spends each month on take-out coffee.
Q: What criteria do lenders expect the remodeler to meet?
A: Most national lenders will deal only with an established remodeler who has been in business for three to five years. Many also review the remodeler's financial statements and insurance records. “We conduct due diligence on each [company that applies],” says Tom Hewitt of AmeriFirst Home Improvement Finance. “We want to make sure they will install products in a workmanlike manner.”
Some lenders even perform background checks to see if there's a history of litigation, or only deal with contractors who meet a minimum sales volume requirement. For instance, KeyBank Home Improvement wants the contractor to have a commercial location, annual sales of at least $500,000, and a net worth of at least $50,000.
Q: What should remodelers expect of the lender?
A: Remodelers should be careful about lenders to which they send their customers. The lender's customer service should be as good as yours. If a customer has a bad experience with a lender you referred, that sour taste in their mouth will have your name on it.