Home improvement financing in the remodeling market is starting to gain momentum, but it's still a small part of the overall picture. Some of the most recent numbers I've seen show that two-thirds of full-scale remodeling projects are paid for in cash or with credit cards, while less than 30% are financed through home equity loans and second mortgages. Just the opposite is the case in the replacement business, where homeowners routinely pay for siding, roofing, window, and similar improvements through financing offered by the remodeling contractor who sells them the job.

I believe this kind of financing will rapidly gain a footing among full-service remodelers. One reason is the low default rate for loans secured by real estate. With the number of remodeling companies taking in more than $1 million a year now at between 12,000 to 15,000 and rising, finance companies are starting to take notice. There is a lot of business to be had, and while remodelers haven't yet taken the initiative, finance companies are already making overtures. As proof, I point to the seven financing companies that exhibited at last year's Remodeling Show in Chicago; the year before there was only one.

Show Me the Money Financing has a lot going for it:

  • Financing sells jobs. By offering financing, you increase your value to customers as a full-service source, and you differentiate yourself from your competition.
  • A credit check is automatic. If you're directly involved in the financing application and approval process, even as an intermediary between your customer and a finance company, you know exactly how much money is available to pay for the project.
  • Fewer delays. Your relationship with lenders may eliminate processing delays and keeps you in the loop so you'll know when the money becomes available.
  • More income. Financing can offer you extra income if you can arrange with the lender to get 2% or 3% of the interest paid.
  • Eliminate competition for savings. You're not only competing with other contractors, you're competing with other ways customers can spend their money. By making financing easy to obtain for home improvements, you won't force customers to choose between spending their savings to hire you or taking a vacation.
  • Shop Around

    Most home improvement financing is an indirect loan arrangement similar to that used by auto dealers. In most cases you'll be able to negotiate the retention rate. This is the amount you will earn, and it is usually paid either as a lump sum or as a percentage of the interest rate over the life of the loan. The rate varies depending on volume but will probably range from 2% to 3%.

    Discuss your options with finance companies rather than banks. Most banks offer indirect financing for automobiles and boats only. Many banks will also insist on meeting the borrowers, while finance companies won't. It could make sense, however, to use more than one lending source. Banks may have lower rates but stiffer requirements, while finance companies have higher rates and few requirements. Using both could broaden your financing program. In either case, most loans must be secured by the real estate being remodeled.

    Of course, there are some obstacles to offering financing. Some customers won't see it as an advantage because they'd rather work with their own bank. Financing also takes additional time and manpower to administer. And in some markets, it may be viewed as part of a “hard sell.” In fact, I recommend you don't emphasize financing in your advertising or sales presentations but offer financing as a service.

    In my view, however, these drawbacks are not enough to stop the inevitable. I believe home improvement financing will grow rapidly in the next five years, and that most companies above $1 million in revenue will set up a way to make it a profit center. —Walt Stoeppelwerth is a publisher of management and estimating information for professional remodelers. 800.638.8292; htbill@worldnet.att.net;www.hometechonline.com.