Very often, the ability to offer financing options to your customers is a significant factor in closing the sale. In part one of this series (September 2004), we reviewed open-end credit and direct closed-end credit. Here, we examine perhaps the most common form of financing a home remodeling sale: indirect closed-end credit.
Indirect closed-end sales. Here, the contractor is selling goods and services on credit, through the use of a credit sale or “retail installment” contract. The contractor will take a consumer's credit application and may complete financing paperwork at the same time or at a later date, usually in the form of a retail installment contract. This is sometimes considered “indirect” financing because it is the contractor who is listed as the creditor on the retail installment contract and not the finance company.
Sometimes, depending on state laws, the contractor (usually through the finance company) might provide the consumer with credit insurance, covering such things as property damage and health insurance, or with the consolidation of other debts, paying off a mortgage or credit cards.
The contractor may even be able to offer the consumer cash out of the transaction. These extras are included on the retail installment contract as part of the credit sale.
Some contractors do, in fact, act as a true creditor in such credit sales, analyzing the consumer's application and determining the terms. The contractor may then collect the finance payments from the consumer, choose to sell the retail installment contract as a separate receivable, or package many such contracts together and sell them as a portfolio in the secondary market to an investor. Usually, though, the contractor has little or no participation as a true creditor in the retail installment sale. Often, the contractor has established relationships with one or more third-party investors, usually finance companies or banks, which act as the actual funding creditor in many credit sales.
The investor reviews the consumer's credit application and terms of the proposed credit sale and advises the contractor if the investor has an interest in purchasing the credit sale receivable. The investor often dictates the precise terms, such as the interest rate, in order for the investor to be interested in later purchasing the receivable.
By obtaining the investor's approval, the contractor can proceed with the credit sale, knowing that, if the investor's conditions are met, the contractor can assign the retail installment contract to the investor after the job has been completed, allowing the contractor to stay out of the financing/collection business. —D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.johansonberenson.com), a national law firm specializing in the representation of contractors and the home improvement industry. 703.759.1055, info@johansonberenson.com.
This article is for informational purposes only and should not be construed as legal advice.