Many contractors already offer easy-to-use in-house financing options for customers who want to pay projects over time. But what about those “credit challenged” customers who don’t qualify for traditional financing?
Turns out, approximately 50% of people in the United States fall into that category — that’s about one in three customers, said Mike Fredricks, senior vice president of Fortiva Retail Credit. Like other financing firms, Fortiva offers a solution for this group of customers that contractors often overlook: so-called second-look financing.
As the name implies, second-look financing provides a way for customers to get credit when their credit scores don’t qualify them for financing from traditional banks. Sometimes called subprime, these financing options also come at higher cost to customers — and contractors.
For contractors, second-look financing can cost 8.5% to 13%, depending on the creditworthiness of the customer, Fredricks said, adding that the average cost is 10%.
But even though those financing costs can be high, they’re offset because they give contractors the ability to reach more customers. Additionally, because second-look financing offers sales people another tool in their arsenal, it can improve employee satisfaction. Most contractors who offer second-look financing see a 10% to 20% sales increase, Fredricks said.
With those types of increases, the return on investment happens quickly, said Matt Michel, president and CEO of Service Roundtable, an organization designed to help contractors improve their sales, marketing, operations, and profitability. “Just accept that you might have to take haircut on your margin,” Michel said. “But as long as you have the installation capacity, it’s still gross profit that helps cover the overhead nut.”
For customers, interest rates can be exorbitant. Some second-look financing firms offer rates in the triple digits. Fredricks said his firm likes to keep interest rates below 30%. But even at that rate, second-look financing can mean the difference between being able to afford much-needed work rather than kicking it down the road and risk higher costs in the future, not to mention potentially dangerous living conditions. That’s especially true for poor and elderly customers.
“Often these are needs based purchases,” Fredricks said. “When a furnace goes out, a lot of people haven’t set aside $7,000 to replace it. And those things often happen when the weather is most extreme.”
But being able to provide that financing has another side effect — improved customer satisfaction. When contractors provide customers with financing they didn’t think they could get, they’re not just happy, they’re also likely to tell their friends about it.
“Most people know they have subprime credit,” Fredricks said. “So when they do get approved customer satisfaction increases.” That in turn leads to more referrals and more business, he added.
Fredricks said contractors interested in offering second-look financing should do their homework. Second-look financing is more complicated than other types, so look for companies that specialize in subprime financing with a track record for doing business in that space. Ideally, you want a company that can offer fast approvals through apps or other web-based software for in home approvals within seconds. As with typical financing, expect your second-look financing company to handle all of the paperwork and pay in a timely fashion.
Once contractors find the right company, Michel said they won’t want to turn back. “Just do it,” he said. “It encourages the use of financing in the first place which results in more sales closed for more money.”