Building Profits With Consumer Financing
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HVAC contractors: if you want to win more business, you must offer financing options, including “second-look” financing for those who might need it.
Affordability Is Key
“Today affordability is really the key — without financing you’d be literally reducing your possible conversion rate by up to 50 percent,” says Joe Kruger, vice president, sales and marketing at Isaac Heating and Air Conditioning Inc. in Rochester, NY. “It’s essential for any contractor who is looking to succeed in retail business to work with multiple financing companies, which will likely increase the chances that a customer’s loan application will get approved.”
To find good financing partners, contractors should look at the plans available for the products they sell, which for Isaac Heating and Air Conditioning is HVAC products, standby generators, and gas fireplaces, he says. A wide range of plans is helpful and contractors should look at fees associated with them, and there are also financing options at local banks and credit unions.
Other things to consider when selecting financing partners include ease of doing business, such as the amount of paperwork required for both the contractor and the customer, Kruger says. Some finance companies require a lot a paperwork that the customer has to sign off on, such as completion certifications, though some companies have those documents in an electronic format via mobile apps that make it more convenient for both the contractor and the customer.
Isaac Heating and Air Conditioning also wants to be funded within 48 hours maximum once the job is completed, he says.
“On the customer’s application we want the financing company to ask minimal questions and have automatic instant approval for people with good credit,” Kruger says. “We know that for people with sketchy credit, other factors come into play that humans need to look at, so the approval process can’t be automatic.”
His company actively markets the ability to finance, and on its website, gives people the ability to apply for financing, he says.
“We also center many of our promotions around affordability, which seems to be the hot button over the last four or five years,” Kruger says. “The ability to finance our products really drives leads for our company and it really does close a lot of sales commitments.”
People can opt for zero percent financing with no interest, he says. There are also flexible plans with 10- and 15-year terms, in which people can elect to pay very small payments when just don’t have cash flow or they can also prepay the loan to satisfy it in less time. Loans that carry interest can range from 6.55 percent to 9.99 percent, for people who have reasonable credit and the ability to pay.
Second-Look Option
Isaac Heating and Air Conditioning also offers second-look financing for people who are denied by first-tier companies, because they have problems with their credit or their cash flow is marginal, Kruger says. Interest rates on these loans are about the same as a credit card, depending on their worthiness of credit – 18 percent to 26 percent.
This should be a full-scale effort, and formal procedures should be put in place, he says. Financing should be offered during all sales visits, and proposals should contain a monthly payment offer and total amount.
HVAC companies should offer financing “readily and aggressively,” so potential clients feel comfortable talking about it, Kruger says.
“Sometimes they are a little shy bringing up the fact that they might need a creative financing plan, so initiating the discussion will help you outperform your competition,” he says. “We find when you bring it up and talk about it, it relieves tension quickly and you become a convenient resource for the homeowner to work with.”
Financing Reality
In today’s home improvement industry world, 70 percent of homeowner’s intend to finance IF it is offered, says Mike Cheatham, vice president, national accounts at Service Finance Company Service Finance Co. LLC in Boca Raton, FL.
“The issue is that a lot of HVAC contractors pre-judge customers one of two ways: Either they do not think they need it, or they do not think they can get it, based on their eye test of the surroundings,” Cheatham says. “All contractors should offer financing upfront and on every call.”
Contractors should show both a short-term no interest loan for the promotional buyer or a longer-term low monthly payment option for the payment buyer, he says. The homeowner then can decide how they will proceed based upon their actual circumstances.
Today, payment buyers make up 60 percent of the market, while promotion buyers make up 40 percent, Cheatham says. Contractors need to show plans for each and doing so they will close more sales with a much larger average ticket.
“HVAC contractors need to recognize that most homeowners may have never purchased a system before or did so 10-plus years ago when the average may have been in the $4500 to $5,000 range,” he says. “Now with much higher efficiency ratings and whole home solutions for indoor air quality you can easily see systems in the $10,000-plus range. Over 80 percent of Americans cannot put their hands on $5,000 immediately so you can see the issue.”
It’s important for HVAC contractors to have primary financing options available to their customers and a second-look financing program to pick up where traditional lenders stop, says Mike Fredricks, senior vice president of business development at Fortiva® Retail Credit headquartered in Atlanta.
Second-look financing comes in behind the prime option to approve customers who were initially declined, by assessing factors beyond FICO score to make an approval decision, Fredricks says. The need is substantial, as more than 43 percent of people in the U.S. have credit scores less than 700, he cites FICO.com, and as such, may not qualify for the primary financing programs.
“For a needs-based purchase such as HVAC, having a suite of financing options available ensures contractors can help more people get the equipment they need,” Fredricks says. “This, in turn, translates into more top-line revenue, bottom-line profits, employee retention, cash flow and referral business from happy customers. Having financing available will inherently help the contractor grow their business and increase their average sale in the process.”
Fortiva® Retail Credit has served more than 17 million customers, which gives the company “tremendous data,” he says. This, in turn, enables Fortiva® to offer “the deepest underwriting available.” Customers with excellent credit as well as near-prime and less-than-prime consumers can all access the financing company’s products with a simple, five-question application. Moreover, the company provides instant decisioning on the loan with an approval decision returned in less than 10 seconds.
“Fortiva® Retail Credit is also readily available on many of the top leading HVAC service and sales software systems, which allows for easy integration into contractors’ existing service platform to make the entire customer experience and back office process seamless and simple,” Fredricks says.
Furthermore, the financing company provides customers with a revolving line of credit, which enables them to purchase higher-quality, bigger-ticket systems — while ensuring they have available credit remaining after their initial purchase “to return for years down the road without going through the application process all over again,” he says.
“Whereas a short-term installment loan would approve a customer only for the cost of the unit they originally picked out, a revolving line of credit often approves them for a higher dollar amount, so they can raise their standards and upgrade to a better system for their family,” Fredricks says. “This also opens up funds for subsequent repairs and replacements exclusively for that contractor or retailer.”
Selling Monthly Payments
Mark Pippin, owner of Pippin Brothers Inc. in Lawton, OK, says that his company is located in a low-per-capita market and more than 90 percent of Pippin Brothers’ jobs are financed, as most people don’t have $7,000 to $12,000 in cash to spend on a new HVAC system.
“So, in our market we have to offer financing, or we just won’t do much business,” Pippin says.
When the sales team offers financing, they don’t talk about total dollars to be financed – rather, they talk about the expected amount of the monthly payment, he says.
“Very similar to how people buy cars — it’s all about the monthly payment,” Pippin says. “We also can tie energy savings into conversation where most of the payment can made up in energy savings.”
Financing is also a good option for people who might have more money, but their cash is tied up in certificates of deposit or investments, he says. Some of the larger financing companies, such as Wells Fargo, have 12-month financing same as cash, so people who might have the cash in several months can just get the financing and pay it off then or in 12 months – “it just makes it easier for them.”
Pippin Brothers offers financing through a local bank and credit union, as well as three national companies — of which one is a second-look company, Pippin says.
“So, if a customer gets turned down from one company, they’ve got five options,” he says. “This is good, because different financing companies require different debt-to-income ratios — some of them look at a person’s monthly debt payments only and some look at their total debt-to-income ratio.”
To be one of the contractor’s financing partners, a company must have a quick ability to approve the loan application within 15 minutes, “because when a customer is ready to buy you want to get it done right then,” Pippin says.
Pippin Brothers likes to use local financial institutions, because they do all the paperwork for the contractor and they don’t charge fees, he says. They also offer customers specials, because when they’re financing HVAC products they can find new customers themselves. For example, they might offer a half-percent discount on the loan if the customer lets them automatically withdraw the loan payment each month from their checking account.
“It’s also good to work with the local bank, because I’m a customer, and they appreciate that I not only bank with them, but I’m also sending them business,” Pippin says. “I get special treatment — they kind of make you feel important when you walk into the branch. They also send us business.”
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