GETTING IT RIGHT
You will get a financing decision much faster by getting the customer to the right lender in the first place. That starts with a good questionnaire. It should ask whether the customer has good, average, or bad credit, and whether they have been delinquent on their mortgage, credit cards, or car payment. And it should ask if there’s anything else they want to tell you about. Says Simone: “You would expect people to lie, but most are more critical of their own credit. They don’t want the embarrassment of being turned down.”
That raises an important point: If you want to keep this customer, you need to be careful not to make them lose face, so don’t over-promise or set them up for disappointment. “No one wants to hear that they got declined for a loan, so if someone has a 550 credit score, we don’t send them to a first-tier lender,” says Pat Pagano of American Siding and Windows Systems in Des Moines, Iowa, who estimates that 35% of his customers don’t qualify for first-tier financing. “We tell them we will get the best deal possible based on their credit score and their home equity. We also quote monthly payments conservatively. If they have great credit, the actual payment will be lower than our quote and we will look like heroes. If they don’t have good credit, the payment will be right where we quoted it. The worst thing you can do is to quote a low monthly payment and then find out that the payment is $40 per month more than you thought.”
One condition for approval is that the lender will likely discount the amount it pays the contractor by as much as 20%. On a $10,000 window job, for instance, the customer still has to pay back $10,000 plus interest, but the finance company will only pay the contractor $8,000. The reason, Simone says, is that lenders can predict roughly how many loans will default, based on their borrowers’ credit histories, and they set their policies to compensate for those losses.
Because it’s illegal to inflate prices for customers who have bad credit, the contractor needs to find some other way to recoup the discount. Pagano simply sets his prices higher. That may mean working with a gross profit margin that’s close to 50% and accepting a certain percentage of discounts that lower it to 35%. “If I know that one out of four jobs will be discounted, then I need to put enough money into my pricing so that it’s not going to hurt me.” He says that making this work means that his salespeople need to sell a job on monthly payments rather than price. If they know how to do that, the fact that his prices are higher than some of his competitors isn’t a problem.
Editor’s Note: Subprime home mortgages have been in the news recently, largely because of foreclosures in cases where adjustable interest rates reset and homeowners couldn’t afford the higher payments. The home improvement finance instruments described in this article differ from subprime mortgages in two important ways: The loan amounts and monthly payments are much smaller, and the interest rates are fixed so payment amounts never change.