“Chop shop.” That’s a term some dealers use to describe a finance company that offers discount financing programs. Doesn’t sound very positive, does it? But without discount programs, many customers would not qualify for financing … which means fewer sales can be closed. And fewer sales means lower profits.
What is discount financing?
Many banks, credit unions and finance companies will only make loans to people with stellar credit. Anyone with a credit blemish is denied. As many dealers know, the past few years of economic difficulties, foreclosures and job losses have taken their toll on a lot of people, some of which is reflected in their credit reports. So, after putting the time, effort and MONEY into getting a commitment to buy, what do you do when your customer has some credit issues?
Here’s where discount financing programs come into play. Rather than simply declining customers who have some credit blemishes, the finance company may offer a dealer a “discounted” approval. The discount is reflective of the customer’s credit and application risk factors. The riskier the customer, the higher the discount. For example, if the finance company offered a dealer an 80% bid on a $5000 loan, the dealer would be paid $4000 for the sale. The $1000 is a fee paid by the dealer that MAY NOT BE PASSED ON TO THE CUSTOMER. It goes to help cover the increased risk of approving a person with a weaker credit history. The discount is a fee between the finance company and the dealer; it does not affect the customer, who in this example, would receive a loan for the full $5000.
Why is discount financing good?
If the only customers who could get financing were those who never had a blemish on their credit, it would be much harder for dealers to close sales. By working with a finance company that can not only finance good credit customers, but also give discounted bids on weaker credit customers, you open up your market. That being said, each dealership needs to understand its margins and know when a discounted deal just doesn’t make sense. But once you have put time, effort and MONEY into getting a sale, making some profit is better than making nothing at all. Remember, these discounts are based on your customer’s credit … these customers are not likely to be approved by strict “approve or deny” lenders and they are less likely to have cash to pay you outright.
Accepting discounted bids when they make sense helps you close more sales overall. This brings other benefits such as helping to keep your salespeople happy, generating future service revenue and referral business from the additional customers and keeping your customers from buying from your competitors.
How much discount is too much?
This really varies by dealership. Each company has its own margins, business goals, cost structure, etc. At Foundation Finance Company, our goal is to offer as many approvals as we can. We approve qualifying “A” credit customers at 100% payouts … but we’ll also offer as many discounted bids as we can down to around a 40% discount (60% payout). We understand that not all dealers can accept discounts this large, but because we work with many different dealers nationwide, each of whom has different business goals, we’d rather give an approval than a denial and put the option in your hands. If the discount is larger than what makes sense for your company, you can always pursue an alternate payment method with your customer.
So, rather than referring to a company that offers discount financing options as a “chop shop,” how about calling it a ONE-STOP-SHOP that is trying to help you close as many sales as possible? Your bottom line will thank you!
Foundation Finance Company offers ONE-STOP financing for A, B, C and D credit. We’ve got programs for water treatment financing, home improvement financing and HVAC financing. Call us today to find out how discount financing programs can help build your bottom line: 1-855-241-0024.