Research: Fickle Financing

In 2014, remodelers and their clients expect to face inconsistent lending practices.

January 30, 2014

Financing for remodeling projects as well as that for remodeling firms continues to remain inconsistent throughout the country. Financial institutions reported they’ve eased lending standards in late 2013, according to a study by the Federal Reserve Board. However, both remodelers and their clients have experienced varying degrees of difficulty when attempting to acquire loans for their business or a remodeling project, respectively.

Depending on their geographic location, remodelers said financial institutions “are offering higher interest rates, which hurts our bottom line and our ability to grow.” In other areas of the country, the banks are “banging on our doors to loan money.” In extreme cases, “we are just waiting for business to turn around so our balance sheet looks better, when that happens we might not need financing.”

Despite the diversity of financing opportunities available to remodelers, money is still being loaned to homeowners, and they are going forward with their remodeling projects. But much like 2013, inconsistent financing can impact the size of some projects or even delay the start of a project.

The profound impact of financing

Naturally, financing continues to play a major role for remodelers as 84 percent say their clients finance their own remodeling project. Of that 84 percent, just over 14 percent of remodelers reported their projects have been completely unaffected by financing problems. In last year’s Financing Survey (see Easier Financing Helping Recovery, May 2013), only 9 percent of respondents indicated they had been unaffected by problems with financing.

Regardless of how the client is financing a project, remodelers continue to see changes in the scope, size, and type of projects. In contrast, some remodeling projects are still being delayed or canceled because of a lack of financing.

In 2014, 36 percent of remodelers expect a client may reduce a project’s size, while 29 percent said they expect projects to be canceled altogether. These numbers are similar to 2013 when 41 percent reported reduced project sizes and 30 percent canceled projects due to financing issues. Still, the financing climate in 2014 and 2013 is better overall than 2011, when 66 percent of remodelers said clients were reducing job size and 59 percent canceled jobs.

Furthermore, 17 percent of remodelers expect projects to take longer to be completed in 2014 due to financing problems. In 2013, the numbers were similar as 18 percent said projects took longer to complete. Again, this is a notable improvement compared with 2011 when remodelers said 30 percent of projects took longer to complete because of financing issues.

Financing challenges have impacted remodeling jobs on a very broad scale. Fortunately, 41 percent of remodelers indicated that financing has an impact on a job less than 10 percent of the time. Twenty-eight percent of remodelers indicated financing impacts a job 10-to-25 percent of time; 21 percent said it happens 25-to-50 percent of the time; and 10 percent said financing issues impact a job greater than 50 percent of the time.

Financing climate for 2014

For the past two years, remodelers are seeing consistency in terms of how clients pay their jobs. Forty-six percent of clients finance projects with loans they arrange themselves, and 43 percent of clients pay from cash or personal savings.

How are remodelers managing financing challenges?
We asked remodelers how they are addressing financing shortfalls. Here’s what they had to say.

“We require a larger minimum initial deposit.”

“We make sure financing is in place before we start the job. We’ve had financing fall apart right near the end of a job and it creates payment problems.”

“I tend to source lenders that I know will present a good image and will reinforce my clients decision to work with my company.”

“We do a better job of marketing to luxury clients that are not affected as much by financial difficulties.”

“I deal with only one lending institution and I know my banker by his first name. We have a very good relationship.”

“Our firm encourages the client to put as much cash into the deal to reduce or eliminate the need to finance.”

“I offer discounts for cash payment.”

“I direct clients to ‘friendly’ banks where I have contacts to help my clients.”

“We offer in-house financing.”

“We provide financing for small- and medium-size jobs. The customer will refinance later.”

Finally, only 11 percent arranged financing through their remodeler.

“We carry our own financing and always have for 27 years. We have no issues with financing,” says one New York remodeler.

In last year’s survey, 45 percent obtained their own financing, 45 percent paid from cash or personal savings, and 10 percent received financing through the remodeler.

Have financing challenges impacted clients and their projects?

“We work with a local bank to get higher loan amounts comparable to future home values,” says an Ohio-based remodeler.

Is financing expected to be more difficult in 2014? Remodelers expect the financing climate to remain similar to the climate faced in 2013, if not slightly more difficult. Thirty-one percent of remodelers expect financing to be more difficult in 2014, 24 percent expect financing to be easier, and 45 percent expect no change from 2013. Last year, 31 percent of remodelers expected financing to be more difficult, 28 percent expected financing to be easier, and 41 percent expected no change.

Changing gears, what about remodelers who are trying to obtain financing and credit to run their own business? Sixty percent of respondents said they do not have a problem obtaining financing while the remaining 40 percent do experience problems. These figures mirror the responses recorded in 2013.

How has the lack of financing or credit impacted the remodeler’s business? Twenty-six percent have delayed purchasing equipment; 25 percent have been forced to reduce the number of employees; 22 percent have been unable to market their business properly; 17 percent have delayed acquiring property; and 10 percent indicated the lack of financing or credit has impacted their business in some other way. PR

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