Nine-year-old Quality Craftsmen Remodeling in East Lansing, Mich., does an annual volume between $500,000 and $1 million. Owner Allen Drouare, CGR, says the company does multi-trade remodels for a higher-end market. His financing consists of referring customers to lending institutions. Ken Greene, president of St. Clair Corporation in St. Louis, says his 120-year-old company finances about 60 percent of its business, excluding gutter protection. St. Clair's total annual volume exceeds $15 million and includes window and siding replacement, sunrooms and decks. Tom Swartz examines the pros and cons of each approach.
Tom: Ken, tell me the advantages of financing.
Ken: Let's say it's a window job where the sale is $7,000. There are a lot of customers who can't afford $7,000 and don't have the means to get it, but they can afford a monthly payment of $150. It increases our sales and lets us sell to customers who otherwise might not afford our products. The other reason is we like to go to market as a full-service company. We measure it; we install it; we service it; and we provide financing if you so desire. All you have to do is sit back and let us do the job.
Tom: Do you have customers who already have financing at another institution?
Ken: Of course. Then we just ask for the required deposit and go about our business. In some cases we secure the financing and they go ahead and get their own financing. When the job is done, instead of signing a completion certificate they'll give us a check. It's absolutely fine.
Tom: Tell me the advantages of providing a referral to a bank.
Allen: If clients have access to mortgage money, the advantages to them are a lower interest rate and deductible interest. Because it would be either a home equity loan or a new first mortgage, their interest would be deductible from their federal taxes. Building a relationship with the bank is a byproduct, and it's nice to have.
Tom: Are there disadvantages to offering financing?
Allen: For the volume that we do, it would be a significant amount of overhead.
Ken: You have to train your sales force. You have to have people who are notaries. You have to have someone who can prepare all of the paperwork. You run title reports. It's another department. So Allen is correct, but I think you can lose business if you don't offer financing as a service.
Tom: Ken, how does it work?
Ken: GE has two basic programs that we use. One is almost like a credit card. Our sales representatives call in from the home and get an approval for a credit limit and an authorization number. They get the credit app signed, the sales slip signed, the notice of recision signed and that's it. On the bigger deals, or where the people do want to deduct the interest, the sales representative gets a credit application filled out with an estimated payment that the customer would like to make and how long of a term they would like to do.
It's turned in to our finance department with the necessary paperwork, checklist, work order. Our finance department will run a credit report, look it over, and decide where to send it. Every lender that we use has different criteria to determine if they're going to buy the loan or not. Usually within 24 hours, 48 at the most, we'll have an answer and know if there are any stipulations with the approval. The whole thing can be done in three to four days; if it's a title report maybe five days. The lender funds us when the job is completed with the satisfactory completion certificates.
Tom: Al, do you deal with the bank on interest rates?
Allen: I would generally just refer the client to my contact at the financial institution. It's similar to building a new home where once the loan is approved they'll meet our specifications, our contract or proposal, in order to create an appraised value. It turns into a normal construction loan with title draws. We'll do a sworn statement with a title company in order to get our draws. The rates are in line with new 30-year mortgages.
Tom: How do interest rates from in-house financing compare?
Ken: It's within a couple of points. This is a service and a convenience we have for the customer. Let's say the best rate we can get them is 8.5 percent, and they're A-1 credit and they can go to their bank and get a home equity loan at 5.5 or 6 percent. They're welcome to do that.
Allen: Are there any loan products where they actually charge you a percentage to use it?
Ken: They might charge us for a title report, but we put it in the disclosure so the customer is really paying for that. The lending institutions do charge you different percentages for deferred payment loans.
Tom: Do you offer deferred-payment loans?
Ken: Yeah. Usually 90 days but we also offer 120 and 180 days. They do not have to make a payment and the interest is deferred from the date of completion. If they pay off the loan on the last day it costs the customer nothing. Then the interest accrues back to day one, but it's added into their payments. The advantage is a customer could buy today knowing the first payment is probably 120 days away and they might have another loan paid off by that time.
Tom: Is it our business to find out our clients' financial needs?
Allen: It's touchy. I had a client once tell me they were going to sell stock to do a project. So I suggested that maybe he would want to take a margin loan against his stock holdings. He pretty much stopped me mid-conversation and let me know, "Thank you, but I am not looking for financial advice. You're my builder and I'll take care of the financing end."
Ken: If they would rather not give us that information, and if they have their own money and give us a third down, that's absolutely fine.
Allen: If you were doing a project for somebody who isn't asking for financing, do you do anything to make sure they have the ability to pay?
Ken: We get a deposit. We get a promissory note signed. And we'll run credit.
Tom: Do you always run a credit check?
Allen: I have never run a credit check on a client.
Ken: On the non-financed ones, if they give us a big enough deposit we do not run a credit check.
Tom: Is there a certain income class of people that will take your financing before other income classes?
Ken: I couldn't give you an exact answer on that. There are doctors and lawyers that do financing with us as well. Their money might be tied up. They say, "I'm going to finance it for a while and we'll pay it off early."
Tom: What kind of amortization have you been seeing?
Ken: It goes anywhere from 36 months to 144 months. It might even be 180 months. It keeps their payment to something that they can live with.
Allen: If we're talking about the new first mortgage, it would either be 15 or 30 years. We're insulated from the home equity loans. It doesn't require anything from us — clients can get that for any reason.
Ken: Do you think you lose deals from customers where they couldn't get the financing?
Allen: I always looked at it as, "Well, they couldn't pay for it," but honestly, if they could've converted into a monthly payment maybe that was an opportunity for us. So yeah, probably so, but I can't think of a specific example. There's probably a business opportunity out there for a financial institution to be a clearing house or an agent for companies like mine that are not willing to push a credit department, where I could go to this lender who could handle it for me.
Tom: What advice would you give to fellow remodeling contractors?
Allen: In order to grow large — to have a large sales volume and to serve a diversified client base — offering in-house financing would be a valuable tool.
Ken: I agree with Allen. If you're looking to grow your business and increase who you are going to market for, then I think financing is a tool that you must have. It gives us the opportunity to sell customers that otherwise we would not be able to sell. We're covering the entire economic spectrum from lower middle to wealthy. If you're going to start increasing who you're going to go after to get your business, then it's a must to offer financing. If you're looking to stay at the very high end, that's a different scenario.