East Bridge Funding asked:


Many businesses selling goods or services that retail for $300 or more experience the same problem; trying to get financing for customers with less than perfect credit. It is heartbreaking when someone is eager to purchase your product, only to find out they have no way of paying for it. When that customer walks out the door, potential revenue follows them.

Finding solutions to this problem can be difficult. Sub prime consumer loan programs aren’t easy to find. Most banks typically steer clear of sub prime unsecured lending. Many businesses often resort to financing these customers in house which is time consuming and expensive to manage and doesn’t deliver immediate cash like typical consumer finance programs or credit cards do. So what other options do businesses have?

Consumer Finance Programs is an answer that many industries have successfully turned to for years. In these programs, businesses sell their newly generated receivables to finance companies for immediate cash on a weekly, bi weekly, or monthly basis depending on volume (often called installment contract funding). The program works much like any A credit financing program would. The customer fills out a credit application. If they are denied by the businesses first look option, they are then sent to the second look option for approval. The second look program is designed to accept a good number of those consumers who the A credit lender deemed “unworthy”. The second look option will underwrite the loan and if it passes predetermined criteria, the lender will purchase the loan from the business, giving the business immediate cash for the receivable and then collecting the debt from the consumer just like the A credit lender does.

Because the second look option accepts a lesser credit class of consumers, it can not fund the business 100% of the principle balance like the A Lender. The default rate on the portfolio will be much higher for the second look option as well as the overhead. It is much more expensive to collect from sub prime debtors as it is from good credit debtors. To offset the higher default rate and overhead, lenders will charge the business a discount fee. It works much like the fee credit card companies charge and it is usually determined by the expected default rate on the portfolio. The more approvals you want (meaning the deeper the finance company will approve credit) the more it will cost because the default rates will raise as you move lower into FICO scores. The discount fee also enables the lender to charge a more competitive interest rate so that your customers will be happy. Discounts can vary greatly from as low as 5% to as high as 50% or more.

A typical loan purchase might look like this:

- Product/Service sells for $2,000

- Business receives a down payment of $500

- Finances $1500 to consumer

- Second Look option approves loan for purchase at a 15% discount ($1275 is funded)

- Lender funds business $1275 – Customer put $500 down – giving the business $1775 in cash for the $2000 product/ service.

From this example you can see that the business was able to make the sale and generated $1775 in cash from the transaction as opposed to the customer walking out the door and the business receiving $0.

Because discounts make these programs work, they are best used in industries that have high product margins so that they can comfortably absorb the discount and still make a sizable profit. Generally you need a markup of 40% or more from what the product or service actually costs you to deliver. Service based industries are perfect matches for these programs. Here is a list of industries where this type of financing and receivables management works well:

- Trade / Vocational Schools

- Seminars

- Travel / Vacation Clubs

- Funeral Services

- Timeshares

- Campgrounds

- Computer Sales

- Consulting Services

- Fitness / Health Programs

- Medical Procedures

- Cosmetic Surgery

- Hair Transplantation

- Infomercial Sales

- College Prep

- Lasik

- Pool/Spa



Stacy

Alan Marshall asked:


Retail finance has been around for some time, the proliferation of 0% , and Buy Now Pay Later ( BNPL ) and Interest Bearing schemes have helped many a company to make their products more affordable to the general public.

A Retail finance facility, essentially is what is termed a DCS facility, DCS stands for Debtor Credit Supply, what this means is that if your client comes into your shop and buys something on your credit facility, then you, the dealer, gets paid direct. This has some obvious advantages, in that, it would not be unknown for a client to take out a secured loan or personal loan and then find something else they would rather spend the money on.

Credit Facilities, come in various guises, as mentioned, Interest Bearing, which is the standard product and basically means a standard credit agreement which has a fixed rate of interest over a certain period , eg 19.9% APR over 36 months.

Alternatives are 0% finance, or interest free, this is where the client is given a rate of 0% APR, but the dealer would have to subsidise this, so in the end someone is paying the interest. Another option is Buy Now Pay Later, or deferred payment, this is where an agreement is taken out on day 1, however payments are deferred, for a number of months. This also carries a subsidy, which is payable by the dealer. With some BNPL packages, if the client pays the outstanding balance, in full, then they may not pay any interest, however, if the client does not pay the full amount, typically at the end of such an agreement there is a 29.9%APR that the client goes into at the end of the BNPL period.

Of all the available retail Credit facilities, your ability to obtain one is dependant upon your business, some lenders require 2 years accounts, some don’t, some will require a turnover of x amount.

A retail credit facility can and will boost your turnover and profitability, should it be used correctly, some large retail companies depend on retail finance for a sizeable amount of there turnover. If anything it widens your net of available customers, because your product can be made more affordable.



Tim