Need To Know Guide to Consumer Financing

Financial institutions have developed many customer financing programs to help home furnishings retailers sell more merchandise to more customers more often.

The benefit for retailers is that financing helps to increase close rates, boost average sales and enable customer retention and loyalty. For consumers, it helps them purchase the furnishings they want or need.

We asked Mike Rittler, General Manager, Retail Card Services, Personal Lending and Business Development at TD Bank about the state of financing in the home furnishings industry. “A recent TD Bank survey,” he replied, “asked furniture retailers questions about financing. This year we saw a large jump to 52 percent in the number who agreed that financing is an important component of both loyalty and sales growth. Only 32 percent agreed in 2018. People are starting to understand that financing plays a role, not only in helping to close sales, but also in driving customer loyalty, which is critical. In that same survey, 77 percent weren't even offering financing yet, so even though they had an understanding of its importance, they hadn't made the leap to offering financing.”

The TD Bank study also found that of those who offer financing programs, 48 percent said that their customers see paying off the purchase slowly over time to be the key benefit, followed by ability to make larger purchases (44 percent).

“Larger retailers, of course, all offer financing,” added Rittler. “Although we didn’t collect information on store volume, I’m speculating that a fair number of folks we talked to were smaller retailers, who might not have qualified for a stand-alone full-branded financing program.

“Many didn’t know that complete, seamless, waterfall solutions are available that offer smaller retailers primary, secondary and in some cases tertiary financing to meet their customers' needs. These offer a one-stop application, authorization and settlement.”

Types of Financing

Private Label Financing: Private Label financing programs give customers immediate purchasing power and are a first choice for consumers with good credit who choose not to pay with cash or credit cards such as Visa, Mastercard or American Express.

These programs offer lines of credit that are administered by financial institutions issuing credit cards branded in the name of a specific retailer. Consumers must qualify for the card that comes with an unsecured open revolving credit line.

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 branded credit card with an ‘open to buy’ or available credit line. Clearly private label financing has other benefits including increasing brand recognition and customer loyalty.

“A retailer's private label credit cardholders are their best customers,” said Jim Seger SVP, GM, Payment Solutions at Synchrony. “They buy more than other customers on average. This is true for large national and regional retailers, associations and buying groups, as well as independent small retailers who generate increased sales and strengthen customer loyalty. Customers benefit from instant access to credit, discounts and promotional offers. Companies like Synchrony seek to differentiate themselves through deep partner integration and extensive marketing expertise.

“Private label credit cards are partner-branded credit cards or program-branded credit cards that are used primarily for the purchase of goods and services from the partner or within the program network. They help retailers to build loyalty for repeat customers, increase sales and drive more traffic. Customers can take advantage of the benefits retailers offer through private label, for example, long-term financing with minimum monthly payments.

“According to Synchrony’s 7th Annual 2019 Major Purchase Study, 86 percent of Synchrony cardholders feel promotional financing makes their large purchases more affordable, which can be helpful when an unexpected expense hits or when they want the very best options for their next renovation. Those cardholders who spent more responded that they did so because they wanted a high-quality product (43 percent), received a good financing deal (39 percent), or the item cost more than anticipated (33 percent).”

Private Label credit card programs may require a significant initial setup investment that financial institutions may be willing to make only for larger volume stores. The programs are paid for through discounts taken by the bank or financial institution.

Installment Financing Contracts: This type of financing contract can be structured as open or closed lines of credit. They are contracts between the retailer's customer and the finance company.

“Our installment loans,” continued Jim Seger, are closed-end credit accounts where the customer pays down the outstanding balance in installments. The terms of installment loans are governed by customer agreements and applicable laws and regulations. Retailers can also offer their consumers a product similar to an installment loan with equal payments on a revolving line of credit. The revolving line of credit allows them to make additional purchases on their existing line of credit.”

Furniture World readers should be aware that the landscape of “applicable laws and regulations” mentioned above is complicated. Installment loan statutes may restrict fees and other elements of financing contract offers. According to the National Consumer Law Center (www.nclc.org), “some states have special statutes for installment loans. In other states, provisions regarding installment loans are embedded in a more broadly applicable consumer lending statute.” Fortunately, banks and finance companies who offer financing options are well versed and can explain applicable law.

Contract specifics (payment terms, finance charge, number of months, etc.) and the discount charged to the retailer by the financial institution are worked out in advance with store management, subject to legal requirements, including rates and terms for customers set as part of the program.

The financial institution is responsible for checking customer credit, communications and collections. Credit applications to be completed by customers are supplied by the financial institution as is training for retail staff. Customer defaults are the responsibility of the finance company.

Installment finance contracts are offered by both “primary” and “secondary” finance companies.

Primary Programs

Primary customer financing programs, also called “first-look” programs are managed by large financial institutions. Benefits include the availability of various specialty financing programs, direct marketing and targeted marketing expertise. Customer finance applications are presented to primary lenders first because they offer the best loan terms and generally lower dealer fees for shoppers who have good to excellent credit.

Sub-Prime / Buy Deeper

Secondary Financing: Companies offer secondary financing options to customers who have compromised credit scores, credit blemishes, high debt or limited job stability.

Shoppers who don’t qualify for financing from a primary finance company may be approved for a revolving line of credit by a secondary lender under different terms (for the customer and retailer) to compensate for added risk, including higher collection costs and write-offs. Traditionally they mitigate risk by requiring quicker payments from the customer to decrease the probability of a customer default.

We spoke to Marlys Mead, National Client Services Manager at Tidewater Finance Company. She observed that many furniture retailers don’t understand how secondary fits into the mix. “Either think we are a primary lender or lease to own company. Secondary finance is a great opportunity to offer a revolving line of credit with deferred interest for customers with less than perfect credit.

"Revolving lines of credit allow customers with open accounts and make repeat purchases without having to reapply every time they want to make a new purchase. Deferred interest allows them to pay off their entire account balance within a specified promotional period, usually six or 12 months, and have all the interest that’s accrued since the original purchase date waived. There’s a lot of confusion about the difference between deferred interest and no interest. Deferred interest gives customers flexibility. They can take advantage of a promotional plan, pay off the account before the plan expires, or make the minimum monthly payment required until the account is paid off, whichever fits their specific need. Even if a customer receives a promotional plan, they aren’t locked into it, and don’t have to pay off their entire account balance before its expiration. They can continue to pay the minimum monthly payment or more until the account balance is paid off. However, if the balance isn’t paid within the promotional period, the interest that has been accruing since the original purchase date will be added to the balance, once the promotional period expires.

“Secondary programs are modeled after primary programs. The main differences are the specifics of the plans offered, and that secondary finance companies dig a little deeper. This gives more shoppers the opportunity to receive financing and make purchase that may have seemed beyond their reach.”

George H. White III, National Sales Manager, Tidewater Finance Company added, “These are customers that have had some type of life instance that caused them to have a FICO score that's not at the prime level due to sickness or the loss of a job. Financing a purchase and paying it off within 12 months interest free can benefit their FICO score and help rebuild their credit.”

The advantage of any Private Label credit card program or sales finance contract is that the credit line made available to customers helps drive future purchases. An added benefit is that monthly billing statements can become a powerful marketing vehicle through the inclusion of statement message offers.

Within the two classes of consumer finance programs outlined above are various types of specialty (or promotional) financing programs that offer added incentives to maximize consumer purchasing power. The most popular ones are:

Deferred interest – a type of promotional financing where interest that accrues on a purchase during the promotional period is only assessed if the purchase is not paid in full within the agreed upon promotional period. Minimum monthly payments are required.

Equal payment, no interest – a type of promotional financing where no interest is assessed on a purchase and equal monthly payments are required during the promotional period until paid in full. The payments are a percentage of the initial purchase amount.

Revolving credit – a line of credit that is automatically renewed as debts are paid off (a credit card is an example of revolving credit).

Unsecured credit – not secured by collateral. Car loans and home loans are secured credit. Most credit cards are unsecured debt.

Tertiary Programs

Lease to Own: Lease to Own (LTO) programs, also known as Rent to Own, provide another option for furnishings buyers who have less than stellar credit or special needs.

“While retailers may have a suite of financing products that serve the primary and secondary space,” noted Ryan Slobodian, Executive Vice President, Snap Finance, “credit- challenged customers, about 35 to 45 percent of U.S. consumers, may not buy in their store because there isn’t a finance offering that works for them.

"And, if this customer isn’t aware that there’s an option for them, they may not even ask about it.

"These consumers are focused on having low cost payment options and crave flexible pay-off options in case a difficult situation arises. That gives them multiple ways to conclude their agreement with the finance provider.

"Leases are typically closed in nature, versus open-ended lines of credit. They are usually single-use vehicles.

"If a lease is broken, there is the opportunity for customers to return the merchandise, but typically we look for ways to help them complete their lease. That may require flexibility in payments if customers run into challenging situations.

“Furniture retailers,” Slobodian continued, “view dedicated rent-to-own shops that sell furniture as competitors. Offering a lease-to-own option draws customers away from those retailers. And, since the price of goods in dedicated rent to own shops tends to be much higher — as are factor rates for finance charges — customers save money.

“But before they can become shoppers, credit challenged consumers must be made aware that furniture stores offer a finance solution that will work for them. That means that ‘no-credit needed’ or ‘we say yes’ messaging can be used to drive these consumers into stores. It’s great to have messaging inside the store, but retailers who place banners on the street, on their websites, and in print advertising, see traffic count increases. If you are someone shopping in the tertiary space, you’re very aware that this kind of messaging is for you.

"I think that the biggest thing for Furniture World readers to understand about LTO is that they need to look at this type of financing through the credit-challenged customer’s eyes. Realize that 35 percent of the people who drive by their stores each and every day fall into this category. It’s a whole new market they have the potential to serve. These people have typically gone through a divorce, experienced job loss, a natural disaster, health insurance issues or an unexpected death in the family. This has forced them to make hard choices that impact their credit scores. It takes seven years for a credit score to come back up. In the interim they need new mattresses and furniture. LTO companies come in to fill that gap. There’s a need in the community, and retailers that partner with people in the LTO space are often surprised to find that they’re really helping people out."

Key Metrics

An important way to make financing programs more effective and profitable is to focus on key metrics. The goal is to drive increased sales through the efficient and effective management of financing programs.

"Tracking things like penetration rate, approval rate, average line and open-to-buy," advises TD’s Mike Rittler, "are critically important. If the program is being used and sold right, the retailer should see deeper penetration of sales through their financing program as well as increasing tickets due to higher credit line assignments. The higher the line, the more shoppers can consider buying. Higher lines also give retailers the ability to encourage buyers to make future purchases. An important way to maximize credit sales with finance sources is to market to customers who have an open-to-buy amount with direct marketing, keeping their brand in front of potential customers who have money available to spend on a regular basis. Remember, the financing companies retailers work with will probably have significant experience and resources they can bring to bear for this opportunity.

“For example, if a customer purchases a $3,200 bedroom and they are approved $3,300, there’s not much of an opportunity to get them back into the store until there’s more open-to-buy. But, if that same customer has a $5,000 line, there's room to come back and engage, without having to apply for more credit.”

Approval Rates — It is a good idea to keep a rolling monthly tally of approval rates. This metric is similar to the close rate you already keep for individual salespeople. Approval rates are a key driver for sales because they directly affect close rates.

Average $ Sales — Another way to drive sales success with financing sources is to not only get more approvals but also maximize them by increasing the average amount financed. Measuring and managing both initial and subsequent add-on purchases helps retailers to manage and build relationships with customers over time.

Booking Rates — What’s the value in getting deals approved but not booked? Not much. So while keeping an eye on approval rates, keep focused on booking rates. For example, let’s assume that a customer applies for $3,000 of financing and gets approved… but only for $1,000. Clearly, the financing company will count this as an approval, yet due to the cutback amount, the deal may not be consummated.

Finance Penetration Rate — This is the percentage of customer purchases that were financed. This measures how effective a retail operation (or individual sales associate) is at offering credit options to customers.

Average Line — The aggregate average line of credit. Average line is a measure of the value that comes from monitoring data and being cognizant of customer purchasing power down the road.

Holding Your Own Paper

While most retailers turn to financial institutions for their financing programs, there are some retailers that choose to finance customer purchases themselves, also known as ‘holding your own paper’. While there can be advantages to this strategy, there are increased risks as well. These include economic uncertainty, human error, less efficient approval processes and collection efforts. Holding your own paper also ties up capital that can be used for operational expansion initiatives and comes with increased reporting requirements.

Considering the pros and cons of in-house credit, a good rule of thumb is to focus on what you’re good at. For most furniture retailers, that is selling furniture and providing customer service. Retailers who have a talent for building and managing an in-house credit portfolio may want to focus on this area as well. If not, then take care because the poor performance of an in-house portfolio can take your attention from what you probably do best... buy, merchandise, market and sell furniture.

The Price

Each of the above programs come with a price tag that must be carefully considered. 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, the larger the discount that will be charged.

The reason most furnishing retailers offer financing programs is that, as was mentioned at the start of this article, it helps them to sell more merchandise to more customers more often. While the direct cost of the financing program cannot be passed directly to the customer, some retailers manage the expense of specialty programs by limiting their use for special sales, establishing minimum purchase limits or restricting their use to individual lines of merchandise.

Delivering the Options

It is useful for retailers to think about how the financing process affects their customers. What would your customer feel like after she’s spent a couple of hours shopping for her dream room, only to be turned down for credit? Does she feel sad, betrayed and angry? Sure she does. Did you take her time, build up her hopes and return nothing? After all, your ad said that you offer credit.

“It used to be that to apply for financing,” recalled Mike Rittler of TD Bank, “the customer had to fill out a primary application and, if not approved, a secondary application. There were a lot of questions and it could take some time. Now it's all about giving customers the most appropriate line, in the fastest period of time, while collecting as little data as possible.

“Retailers need financing to feel like it’s just part of the general flow of the furniture sales process. In the past, financing at a retail location, particularly in the promotional financing space, was anything but quick and easy. Today, all that has changed, however, our survey of retailers taken at the most recent Las Vegas Summer Market revealed low adoption of waterfall financing: Only 23 percent said they offered it to customers. So, our industry has a long way to go."

Questions to Ask

“You have to think about everything that will make them feel comfortable in the store: like they’ve come home. Then they will want to take a little bit of our home to theirs.”

Whether you are experienced at offering consumer financing in your retail operation or are looking for new solutions to help your customers buy, here are some questions you will probably want to ask the financing companies you are considering working with:

• What do you know about my industry?


• What do you know about my company?


• What level of attention are you going to give me?


• Do you offer or can you help me develop programs that will speak to my customer base?


• How do you help my employees to understand and present financing options to my customers?


• What will the customer financing experience be like with your solution?


• How will you engage with my customers to help me attract customers, build bigger tickets, close more sales, create loyalty and bring customers back into my store?

Whose Customer Is It?

There’s general agreement among furnishings retailers and companies that offer financing products that the customer is first and foremost the retailer’s customer.

When you offer and manage customer financing programs, you extend your customer relationships beyond your immediate control. If you strive to maintain a high level of customer service and satisfaction, the fact that a financial services company will handle credit approval, servicing and collection may be cause for concern. That’s because their success (or failure) in servicing your customers will, to some degree, reflect directly on you.

So, you want to work with companies that will make good partners.

A key to avoiding problems in this area is to always take complaints about customer service and collection issues seriously and respond to them promptly. You should take a proactive approach by asking customers about their service experience with your financing programs through customer service surveys, via random calls from the back office or by querying returning customers. Make sure to collect and keep documentation for use in discussions with your financial institution partner. Any issues that arise need to be handled immediately to ensure that your partner meets or exceeds your expectations for quality customer service.

“The most successful retailers,” Mike Rittler told Furniture World, “treat the financing companies they work with as partners, not just vendors who provide a service. At their best, financing programs are more than transactional. They help drive traffic, engagement, loyalty, repeat purchases and sales. To do this, retailers and finance companies need to work hand-in-glove to promote the retailer’s brand, share data when possible, understand and meet customer needs.”

Again, ask yourself, “Whose Customer is it?” and manage your program accordingly.

Loyalty Programs

One of the major benefits that companies that offer financing solutions cite is increased consumer loyalty. Synchrony’s Jim Seger says that, “loyalty programs help retailers to stay top of mind as customers receive emails and statements regarding their account every month. These are the best customers to target for incentives to drive loyalty. Loyalty ranges from instant gratification options like discounts to spend-and-get rewards. Retailers should also consider what motivates their customers and differentiates them from the competition. This can be experiential, too, like inviting customers to a sale preview or meeting with a design expert.”

Keys to Success

It doesn’t matter if you are a three million dollar volume retailer or produce hundreds of millions in annual sales. You deserve to have your customers treated with the same quality service that you deliver in your operation. It is up to you to make sure that the company you partner with ensures this level of service. It’s also up to you to make sure that the way you deliver financing solutions to your customers is easy, seamless and professionally delivered.