Part 4: Drive Sales and Profit through the effective implementation and management of your In-House Financing Solutions.
I love sales… and everything about the selling process, especially meeting and exceeding customer expectations. In the last three issues of FURNITURE WORLD Magazine, we’ve looked at various tools and solutions across the customer financing spectrum. These tools when implemented and managed effectively, can help you drive sales and associated margins through your Financing Programs.
The objective of this article is to move further along the credit spectrum into the world of carrying your own paper (in-house receivables). This article will describe strategies and best practices that can help you to create additional and larger sales while boosting your margins.
Home furnishings retailers fit ‘in-house financing’ into their financing program mix in a number of different ways. For example, some retailers successfully use primary financing sources (see the last two installments in this series posted to the FURNITURE WORLD article archives on www.furninfo.com) for their specialty programs (or, as I like to call them, the buy now / pay never programs), and come right behind with their in-house program. Other retailers use their in-house solution as a ‘last resort’ after all primary and secondary financing options have been exhausted.
As part of the decision-making process, you will first want to consider the infrastructure you already have in place or are willing to put in place to support an in-house financing program. You should then review the following list of benefits and risks faced by furniture retailers that incorporate in-house financing into their financing mix.
Benefits Of In-House Credit Programs
•You already have front-line knowledge of both your local economy and customer base. This hands on experience will help you to personally judge the risk and reward potential of providing in-house credit to any individual client. And, since you maintain ‘ownership’ of your customer base, you can drive a greater amount of ‘add-on’ sales.
- You can customize your in-house finance program to fill in the gaps in your primary or secondary financing sources through the use of proprietary tools (down-payment matrix, best-bureau solution, etc.)
- You will have the capacity to customize payment schedules to meet the customer’s needs while maintaining acceptable risk/loss levels (charge-offs).
- You can develop localized – relationship driven collection strategies.
Prior to outlining the risks you face in managing your in-house credit programs, let’s weigh-in with what should be your general strategic business philosophy: Focus on doing what you do best. That is, selling furniture while providing for a superior experience for your customers.
With that said, don’t turn your back on developing or managing your In-House Programs, as there are some excellent resources that you can use that will ensure that your program is a success. Even so, here are some of the inherent risks followed by various strategies that will assist in mitigating such risks.
Risks Of In-House Credit Programs
- An ever-changing collection landscape (economy, laws, bankruptcies, etc.).
- Infrastructure expenses (collections, customer service, compliance, etc.).
- The potential of tying up capital that may be much needed to expand various operational initiatives.
- Collections and charge-offs have the potential to destroy a business if specific delinquency and charge-off targets are not maintained.
Who To Approve - How To Approve
The first questions that many retailers ask when discussing in-house credit programs are, “Who do I approve and How do I get them approved”?
Up until recently, adding another financing solution to an existing suite of solutions (primary, secondary, sub-prime, etc.) was a headache all by itself, as there was usually a lot of work to be done to take your customer through successive credit applications and refusals by fax, internet, phone, etc.
Retailers concerned about the extra complexity associated with adding an in-house credit option can look at a technology solution such as Approvalware / Decision Station (www.approvalware.com). This is a platform that applies both technological capabilities and credit decisioning analytics throughout your various credit programs (including your in-house program), bundling them into one solution.
Bundling the credit processing and decisioning analytics platform drives results by:
- Ensuring that every application gets the full look of all your credit program options. You will never have another customer fall through the cracks of your existing processing system.
- Significantly increased efficiency as you will eliminate the manual management of moving applications from one financing program to the next.
- Maximizing every credit sale by utilizing the analytics in the platform to ensure every customer gets approved for the maximum credit available to them.
- Utilize the analytics (brains) of the platform to monitor performance of your existing receivable portfolio driving increased performance while decreasing charge-offs that directly hit your bottom line.
A solid case study of a company that embedded a quality analytics platform is Texas based home furnishings retailer Lack’s Furniture. They found that using the application/ analytics platform developed by Dr. Pat Nanda of Creative Business Decisions (www.cbdcredit.com), which is now delivered via the Approvalware platform, yielded the following results:
- Year 1: Reduced charge-offs by 33%
- Year 2: Reduced charge-offs by an additional 25%
- Year 4: Reduced charge-offs by 58%
- Continued increases in portfolio
- Improved year 1 ROI by 20 fold
- Improved year 4 ROI by 35 fold
These results were driven through the following strategic deliverables:
- Established historical data / performance benchmarks.
- Increased performance predictability.
- Capitalized on existing customers “in a greater way”.
- Developed new scorecards for new and existing customers respectively.
- Created custom decision strategies for appropriate approval/denial reasons.
Clearly, the program helped to maximizing Lack’s Furniture’s lending opportunities while protecting the performance of their portfolio with clear-cut, disciplined strategies and credit policies.
Meeting Capital Needs For In-House Credit
Unless you are one of the fortunate (albeit rare) retailers with endless bundles of cash to fuel your in-house credit programs, you will want to associate yourself with a financial entity that will assist you through the growth and management of your receivables by providing a Line of Credit based on your program’s strategy and performance.
One such entity is Sterling Financial Services Company, Inc., a subsidiary of Sterling Bancorp (sterlingbancorp.com) that provided us with the following list of benefits of line-of-credit programs.
- Provides capital to allow for continued sales / receivables growth.
- Maintain your existing credit policy.
- Build better relationships with customers.
- Boost profit growth because of increased sales and higher interest
Income while increasing repeat sales (a key performance lever of in-house financing programs).
Who can benefit from using a line of credit?
- Retailers that are currently carrying their own receivables and have either no or limited debt on them and are unable to grow due to cash restraints.
- Retailers that are already aligned with a lending institution but are looking for expanded credit lines or superior service.
High volume retailers (over $1 million financed annually) that don’t carry their own paper but want to start expanding sales, while avoiding selling sales finance contracts at a discount to various lenders or losing the sale all-together.
In speaking with Mike Czysz, Vice President for Sterling Financial Services, it is clear that Sterling Bancorp takes a hands-on approach in designing a specific package of services for a number of strategic lending needs, including: Asset based lending (credit lines), factoring, equipment leasing and international letters of credit (to name a few).
Revenue Targets For In-House Financing Programs
A clear objective of carrying your own paper, aside from the margins derived from increased sales, is to drive revenues via your in-house financing program. In addition to finance charges (interest) and associated fees (late charges, NSF fees, etc.), there are other revenue streams that you can take advantage of such as credit insurance and extended warranty programs.
Need For Credit Insurance
Credit insurance protects both the creditor (you, the retailer) and the debtor (your customer) in the event of your customer’s loss of life, disability, property damage or involuntary unemployment. With these insurance products in place, you and your customer will be protected against any of the unforeseen events outlined below.
Risks: Credit insurance protects your receivables in the event of the insured’s inability to pay due to a ‘covered loss’ (death, disability, etc.). In addition to protecting your receivables, marketing credit insurance can also create additional revenue as you, the creditor (your retail entity) usually receives a commission, or fee, from the premiums charged to, and collected from, the consumer. In most states you can include the premium with the amount financed on your financing contract. This commission in the form of sales or servicing fees, can run upwards of 5% of sales. The fees allowed by law will vary from state to state and will vary depending on the type of coverage and premium volumes.
The number one reason most customers stop paying their bill is that they lose their job or are temporarily disabled from an accident or sickness. Offering your customer credit insurance provides them with the confidence they need to purchase on credit. It also allows you, the retailer, to feel comfortable with more liberal credit policies since you have additional payment protection.
Compliance and Structure: Credit insurance is regulated by State law, and you may be required to obtain an insurance license and limit compensation in the form of commissions and servicing fees.
If you decide to establish a credit insurance program to protect your receivables, you will need to incorporate the insurance products and formulas into a your POS software system (for more streamlined administration of the program). Additionally, you will need to issue a certificate of coverage to your customers at the point of sale or contract execution.
All of the infrastructure needed to market and support various credit insurance programs may seem onerous at first glance, but they can still be well worth the effort due to the protection and revenue stream associated with them. The key to success is to find a strong and knowledgeable provider that will spend the time needed to fully understand your business before structuring a program.
Extended Service Contracts
Another way to reduce the risk associated with offering in house credit is to offer your customers extended service contracts. These protect your customers against unforeseen product damage or loss. A surprising number of consumers who have had their furniture damaged will choose to stop payments. Offering an option to repair or replace these items, therefore, serves to further protecting your receivables, while providing additional profit on every sale.
As with any service provided by an outside company, care should be taken to ensure that your extended service contract provider will handle your customers in a way that is consistent with your business model. This topic was discussed more fully in the October/November issue of FURNITURE WORLD with an emphasis on primary financing companies. Any delays, rudeness, or rejected claims that refer to the “fine print on the contract” will be seen by your customer as your failure as well.
In an upcoming issue of Furniture World Magazine, we will be taking a deeper dive on the Best Practices of offering and administering Extended Service Contracts.
Glenn Hafner is the President of Hafner & 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 for HSBC – US, Glenn provides detailed insight on driving sales through the effective / efficient use of Customer Financing Programs. Inquiries on any aspect of financing programs can be made to Glenn at firstname.lastname@example.org.
Glenn’s recent presentation at the High Point Furniture Market focused on “The Customer Financing Spectrum: How to Optimize Your Revenue”. For a copy of the insightful presentation forward your request to Glenn at email@example.com.