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Consumer Financing - Part 1

Furniture World Magazine


Part 1: Overview of plan types, the costs and benefits of each.

While excellent retail locations, creative showroom design, balanced inventory, an educated sales staff and professional service/ delivery are all critical elements that help your business to succeed, there is a tool that is often either overlooked or not given the priority or strategic focus needed to ensure sales success and build customer loyalty. That tool is your Customer Financing Program.

The goal of this series of articles is to provide an overview of Customer Financing Programs. In addition to defining the various types available; the benefits of each will be considered along with how to market and manage them to help you to drive sales while increasing customer satisfaction and loyalty.

The benefit of managing your financing programs, whether you are a retailer, association or a manufacturer, is simply to sell more merchandise to more customers more often while ensuring their satisfaction. With many American’s budgets already stretched thin, fewer consumers have the cash on hand to make larger purchases such as furniture or accessories. Many of them, however, are able to make reasonable monthly payments that fit nicely into their budgets. For example, a customer who has only 1,000 in savings; enough for a sofa, but not an entire living room ensemble, can easy agree to a $60 monthly payment. She gets instant satisfaction and your store quadruples its sale.
Throughout the years, consumers have been exposed to financing options in advertising campaigns for durable goods that include program specifics. In many instances, these options turn a ‘nice to have’ consumer purchase into ‘must have’ item. In addition, retail stores that provide good financing solutions find that customer satisfaction and loyalty increase. Consumers view financing as a way retailers can help them to more easily purchase what they want.

While most retailers turn to financial institutions for their financing programs, there are a select number of retailers that choose to finance the consumers themselves, also known as ‘holding your own paper’. While there are some advantages to this strategy, such as better approval rates as you have a close knowledge of both the local economy and your customer, there are many pitfalls that have the potential of overriding the benefits. These pitfalls include increases in personal bankruptcies leading to losses, lack of technology and inefficiencies in servicing or collecting the accounts.

Financial institutions (banks, finance companies, etc.) have developed a myriad of Customer Financing Programs. These service varying retailer and customer demographics and drive acquisition, greater ticket sales, retention and loyalty. The two primary types are Private Label Financing and the Sales Finance Contract.

Private Label Financing: Private Label financing programs give customers immediate purchasing power at your store and become a ‘first option’ for many customers making future purchases.

Private label programs are administered by a financial institution that issues a branded credit card (with your store’s, association or manufacturer’s logo on it) along with an open credit line that can only be used at your locations or for your merchandise.

The customer’s key question/objection of “how are we going to pay for it” is easily answered if they open their wallet and find your credit card with an ‘open to buy’ or available credit line. Clearly there is significant focus on fostering brand recognition and customer loyalty.

Private label credit card programs require a significant initial setup investment that financial institutions may be willing to make only for larger volume, multiple location stores. The programs are paid for through discounts taken by the bank or financial institution. These are explained in more detail below.

Sales Finance Contract: This type of financing is usually a closed end, fixed payment contract between store and customer, outlining the terms of the purchase (invoice items, payments, finance charge, number of months, etc.). The contracts are not held by the retailer, but are sold to a financial institution.

A standard contract is supplied to the retailer and rates /terms set as part of the sales program. The contract specifics and the discount charged to the retailer by the financial institution are worked out in advance with store management. For example, if a retailer chooses a 14% rate for their contracts, they might pay a 6% discount, whereas if they choose to charge their customers 24%, they might pay nothing.

The financial institution is responsible for checking customer credit. Credit application forms to be completed by customers are supplied. Credit approval typically takes seconds to several minutes depending on the financial institution, technology used and the customer’s credit picture. Customer defaults are the responsibility of the finance company.
Sales Finance Contract programs were developed for smaller volume retailers or ‘buy deeper’ programs. “Buy deeper” programs cover customers who may have credit blemishes, higher debt ratios or limited job stability. Finance companies may approve these customers under different terms than prime credit customers to compensate for their added risk.

The advantage of any private label credit card program or sales finance contract is that the credit line made available to your customers helps to drive future purchases to your store. An added benefit is that monthly billing statements can become a powerful advertising vehicle through the inclusion of statement messages and direct mail offers and inclusions.
Within the two classes of Consumer Finance Programs outlined above are various types of specialty (or promotional) financing programs that are utilized as an added incentive to maximize your customer’s purchasing power. The most popular ones are:

Straight Financing: This program amortizes the amount financed over a set period of time with the first payment typically 30 days (extended first payment can be 45 days) from the date of purchase (delivery). Finance charges commence on Day 1.

Same As Cash: These programs allow the customer to make his/her purchase interest free over a period of time (typically 3, 6, 12, 18 months). Regular payments are required during the Same As Cash (SAC) period and the account must be paid in full by the end of this period or interest charges will be charged from Day 1 of the contract.
Same As Cash programs allow customers to make purchases early, in anticipation of future earnings. Customers get instant gratification and postpone those unpleasant payments without obvious penalty in the form of interest payments.

No Payments: While interest accrues from the purchase date, no payment is required for a set period of time (typically 3, 6, 12, 18 months). This feature helps your customer budget towards an expected upcoming bonus, tax refund, etc.

No Payment / No Interest: This specialty program allows for no payment and no interest for a set period of time (again, typically 3, 6, 12, 18 months, however, there are some 24 month programs offered on a very limited basis). This provides the maximum purchasing power in the mind of the customer as they foresee and rely on positive changes in their financial situation over time and budget accordingly.

Each of the above specialty programs come with a different price tag that must be considered into your financial business plan. Straight financing programs (not specialty programs) can reward your business with potential participation (a percentage paid to you by the financial institution based on the amount your customer financed). Straight financing has the potential to either offset any expense of managing your financing programs or can lead straight to your bottom line as revenue.
A majority of these programs discount the amount paid to you by the financial institution. This can put pressure on your margins if not managed effectively. Naturally, the longer the term of your specialty program or inclusion of a ‘No Interest’ feature is, the larger the discount that will be charged. However, it has been proven that these programs do drive sales and thus a close analysis of increased sales vs. discount expense will prove beneficial. While the direct cost of the financing program cannot be passed directly to the customer, many successful retailers manage the expense of these specialty programs. They do this by limiting their use for special sales, establishing minimum purchase limits or restricting their use to individual lines of merchandise. The need to analyze and manage the use of these is critical as carte blanche use of these costly programs may negate the benefit of any positive upswing in sales volume.

We’ve looked at some of the benefits to the retailers, associations and manufacturers.... so what are the benefits to the financial institutions? Certainly they receive interest income on those customers that don’t pay off in full and buy the contracts at a discounted rate, however, with some of the specialty programs, as many as 70% of the customer’s pay off in full and don’t pay any interest.

Generally these programs by themselves aren’t big moneymakers for financial institutions. They are, however, another channel for these financial institutions or finance companies to obtain new customers so that they can market or cross-sell other financial products such as checking/ savings accounts, investments, mortgages, lines of credit and loans.

So, in turn, you and your chosen financial institution have the same goal. To market, acquire and provide exceptional service to new and existing customers.

The next part of our series will provide an in-depth look at how to manage the relationship/partnership with your financial institution so that you can leverage each other’s strengths. Since you have goals that are aligned, this will ensure that you drive additional sales and increase customer satisfaction through the utilization of your Customer Financing Programs.

Glenn Hafner is the President of Hafner and Associates, a consulting firm that focuses on providing “strategies that drive revenues”. Formerly the National Director of Sales Contracts for Beneficial Credit Services, National Director of Strategic Initiatives for Household Finance, and Group Director of Brand Management and New Product Development and Management for HSBC-US, Glenn provides detailed insight on driving sales through the effective use of Customer Financing Programs. Inquiries on any aspect of financing programs can be made to Glenn at gehafner@furninfo.com or you can reach him directly at 630-377-5768.