Retailers such as The Home Depot and Best Buy have found deferred-interest “same-as-cash” credit promotions an effective way to increase sales. The store lets the customer walk away with the purchase for no money down, and agrees to not charge interest if they pay in full before an agreed-on deadline, which could be 30 days, 6 months, or 1 year from the date of purchase.
Photo Credit: David Plunkert
This tactic has worked so well for retailers that remodeling and replacement contractors are now starting to offer it to their customers. Those who feature same-as-cash in their marketing and sales efforts say that it generates more leads and helps close more sales. But they also say that it's important to make sure that customers understand the terms, and they caution that you may have to offer salespeople some incentives.
Same-as-cash loans are usually unsecured, with maximum amounts of $25,000 to $35,000, according to John Harris, senior vice president of National Sales & Marketing at EnerBank USA, a Salt Lake City company that provides same-as-cash payment options to contractors. He says that while this type of financing is just one more tool to add to the contractor's sales arsenal, companies that offer it to every customer invariably make more sales. “We have seen contractors who are closing two-thirds of their prospects today, compared with one-third before they began offering same-as-cash financing,” Harris says. “We find that when there's a payment deferral for a certain period of time, what ends up happening is that the contractor has removed all impediments to the customer saying ‘yes.'”
Mechanical contractors as a group are more experienced at using this tool than most remodelers or replacement contractors. One mechanical contractor who raves about it is Glen Blavet, owner of Albert Plumbing in San Marcos, Calif. He says that his salespeople present the same-as-cash option to every customer, and that it has been a big factor in helping grow his annual business from about $5 million in 2004 to $11 million last year. “We offer the same-as-cash option on every job we do,” Blavet says. “If you are not offering it, you are absolutely crazy.”
Of course, some financial advisers think the crazy ones are the buyers who take the deal. They point out that with a 0% financing offer the deferred finance charge accrues from the day the customer signs the loan papers. If the loan isn't paid off before the end of the promotion, the buyer will have to pay all of the back interest. In the case of a six-month same-as-cash loan for $10,000 at 12.25%, the customer would be liable for $600 in interest. That's not only unpleasant for the customer, but it could leave them with a bad aftertaste for your company.
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Although it's crucial that you clearly explain these terms to customers, Harris claims that the problem tends to be overstated and that 9 out of 10 customers pay off the balance before the due date. One reason is that same-as-cash terms are more manageable on smaller projects. “Paying off a $10,000 window replacement job in six months is one thing, but if you're doing a $50,000 kitchen remodel that may not be realistic,” says Bruce Christensen, vice president of Home Improvement at GE Money, which also offers deferred interest as part of its menu of financing options. Christensen says that on larger jobs, a lower-interest loan secured by the property usually makes more sense.
Some contractors find that customers who take advantage of these offers tend to be more sophisticated and financially stable than the typical payment buyer.
According to Tom Audette of Renaissance Exteriors in Maple Grove, Minn., a replacement contractor that has been offering same-as-cash deals for five years, the typical same-as-cash customer is someone who intends to pay for the job by selling some stock, but wants to wait a few months for tax reasons. “Deferring the payment removes the time objection and allows our salespeople to close the deal today,” Audette says. These customers usually have good credit and the ability to pay cash if necessary, he points out, but they see the benefit of deferring payment for a few months.
SELLING SALESHarris says that there are two types of same-as-cash programs: indirect and direct. In an indirect program, the contractor finances the job and the financial institution buys the loan from the contractor when the work is complete. He says that such programs require the contractor to provide customers with a credit application, to inform them of their three-day right of rescission, and to disclose all the terms and conditions. This creates more paperwork for the contractor and can add liability.
Photo Credit: David Plunkert
By contrast, with a direct lending program the contractor tells the customer about the availability of same-as-cash financing and provides the lender's toll-free phone number. The lender takes the application and manages the paperwork. When the job is done, the check is made out jointly to the contractor and the customer, so the customer can't use the money for anything else.
Pitching this financing option to someone is a bit different from pitching other types of loans. “With traditional financing, you sell the customer on a monthly payment,” Audette says. “But the same-as-cash customer is basically a cash customer. They could pay out of pocket today if necessary, so you need to appeal to the time-value of money. The key to making it work is to get your sales reps to understand how the benefits of same-as-cash will bring more sales.”
One hurdle to convincing salespeople is the fee charged by the lender. For instance, EnerBank charges the contractor 3% to 7% of the loan amount, which can lead sales-people to devalue the job in their minds. “Sales guys don't look at the big picture,” says Scott Trendle of One Stop Home Improvement, a Sterling Heights, Mich., replacement contractor. “If there's a 7% charge, that amount comes off of the job price, and since their pay is based on the dollar amount that's sold, their commission also decreases somewhat. It doesn't affect them greatly, but it affects them enough [to create some resistance].”
Contractors counter this resistance in different ways. Audette, like most contractors, builds the fee into every job quote and offers a discount to customers who pay cash. Regardless of whether the customer finances, the final price is close to what the company really wants for it.
Ultimately, the best way to win salespeople over is to demonstrate that the increased volume that same-as-cash generates will more than compensate for the fees. When Trendle first started offering it a couple of years ago, he took a cue from the same-as-cash strategy itself by offering to let his salesforce try it for free. “For the first month that they offered it to customers, I agreed to eat the fee for all 30-day promotions and to split it with the sales guys for all one-year deals.” The offer eliminated his salespeople's reluctance to offer same-as-cash to customers, and they quickly embraced it. “You need to create buy-in with salespeople. Once they use it, they understand that it's a great tool.”