Most lenders in the home improvement financing space approve or deny applications for credit solely based on a customer’s credit score – which typically needs to be prime. So, what happens to customers that have average credit or challenged credit? That’s where discount financing comes in.
At Foundation Finance, we can approve customers with a wide variety of credit profiles; we also have a great discount financing program. Instead of denying a customer because their credit is weaker, we can approve at a discounted bid meaning you (the contractor) will pay a risk discount fee.
What is discount financing?
Many banks, credit unions and finance companies will only lend to people with stellar credit. Anyone with a credit blemish is denied.
Here’s where discount financing programs come into play. Rather than simply rejecting customers who have some credit blemishes, Foundation Finance 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.
Important: The discount is a fee between the finance company and the dealer; it does not affect the customer, who in this example, would receive coverage for the full $5000.
Example:
$5,000 sale to a customer with weaker credit.
Financing approved at a 95% bid (5% risk discount for the dealer).
Customer still finances $5,000 for the project.
Dealer is paid $4,750 at funding time.
Why accept a discounted bid?
Without discount programs, many customers would not qualify for financing…which means fewer sales can be closed. And fewer sales mean lower profits.
- Close more sales.
- Close sales that other lenders decline.
- Some profit is better than none.
- Get future business from existing customers.
- Increase referrals – happy customers are likely to recommend you. If you’re able to finance a project for them that another company is not – it’s win/win.
How much discount is too much?
This varies by business. Each company has its own margins, business goals, cost structure, etc. At Foundation Finance, our goal is to offer as many approvals as we can. We approve customers with qualifying credit at 100% payouts, but we’ll also offer as many discounted bids as we can.
We understand that not all dealers can accept large discounts, but because we work with many different dealers nationwide, each of whom has different profit margins, we’d rather give an approval than a denial and put the option in your hands. Figure out where your margins are and what you can afford to accept on each deal since those costs cannot be passed on to your customer directly.
When pricing projects, you may want to consider the average financing cost and build it into your pricing. For example, if you determine that your average financing cost per customer would be 5%, you could increase your prices overall (for all customers) by 5% and then, if you chose to, give a discount for those paying cash. Or you could just use the extra revenue to offset costs on other special promotions you choose to use. What you can’t do is decide to raise the price on a customer after he or she chooses to finance. This is not allowed under Truth-in-Lending regulations.
If the discount is larger than what makes sense for your company, simply decline our offer and pursue an alternate payment method with your customer.
Interested in other ways Foundation Finance can help you close your next sale? Contact us for more info: 1-855-241-0024, [email protected].
You can build on us. Enroll in the Foundation Finance dealer network today.
