When Good Customers Have Bad Credit

Jan. 31, 2007

About the author: Tracey Sheehan is president of Carmel Financial Corp. For additonal information contact, Pam Prickett at 317.844.7951, ext. 209, or by e-mail at [email protected]

As of 2005, there were more reported bankruptcies per capita than during the Great Depression. Even though bankruptcy filings have slowed in the wake of recent reform legislation, the growth of consumers with bad credit has not. In fact, it has increased significantly. Under the new bankruptcy law, unsecured debt that previously would have been discharged remains as bad debt.

Divorce, layoffs, repossessions, defaults, unpaid health care bills (due to insufficient or nonexistent insurance), credit card abuse and identity theft have contributed to significantly diminish the pool of customers who readily qualify for a loan from a primary lender.

While once a small minority, consumers whose credit applications are rejected by primary lenders are now an expanding group that often includes individuals with solid, well-paying jobs.

Save the Sale

If your customers rely on financing to afford your products, how will you keep sales from walking out the door? There is a way to save both the sale and the customer by forging a partnership with a secondary finance company. A dealer can then secure financing for every single customer rejected by a primary lender.

Secondary lenders have been around for some time. Here’s how secondary finance works. The lender reviews each customer’s financing application individually. An analyst then prepares a document stating how much the lender will pay for the sales contract. For example, if the price of the product is $10,000, the secondary lender may return a bid that covers 90% of that figure. The 10% reduction reflects the likelihood customers with a credit history similar to that applicant will default on their loans.

Regardless, with a reputable secondary lender, the dealer has the final say. They either can accept the bid and move forward with the sale or reject it and the entire transaction. Accepting the secondary finance bid, however, can save the sale and most of the profit. After all, some profit is better than none at all.

As for the customers, reputable secondary lending companies treat them like you do—like people. Reputable secondary finance companies also charge interest rates no higher than those of primary lenders.

How to Choose a Lender

Here are some tips for choosing a secondary finance company that will boost your bottom line without complicating your business. Remember, if you aren’t offering your customers a way to buy your products, your competition will.

  • Look for longevity. You want to make sure the company you enlist is going to be around to back its commitments.
  • Get answers to your questions. Assess how well a secondary lender answers your questions. Is the company responsive and sensitive to your needs?
  • Seek flexibility. Secondary lenders must be not only willing but also able to effectively evaluate each applicant individually so they can find a way to help you make the sale.
  • Choose your friends wisely. Don’t let a pact with a predatory lender or disreputable secondary finance company ruin your good reputation. Work only with secondary lenders that set fixed interest rates comparable to those of primary lenders.

A reputable secondary lender can be a win-win situation for everyone—for the dealer, for the customer and for everyone whose jobs depend on the production and sale of your product.


Financial Flexibility Made Easy

As more Americans find themselves with less-than-perfect credit, secondary financing will play an increasingly critical role in the home improvement market, particularly for large purchases such as a water treatment system, according to Tracey Sheehan, president of Carmel Financial Corp.

For Apex Water Solutions of Greensboro, N.C., Carmel Financial has played a measurable role in the firm’s success. When Apex Water Solutions opened in November 2005, owner Elliott Gottfried knew the one thing many of his customers needed just as much as a whole-house water treatment system was financial flexibility.

Greensboro, like many areas of the country, has hard water. “It has either too much acid or too much alkaline. And many people are on wells, so they also have a lot of issues with iron,” said Herb Surgeon, finance manager for Apex.

“We take the time to teach customers about their water issues, and how a whole-home treatment system not only benefits their health but also saves them money,” Surgeon explained. “However, if the customer can’t get financing, they’re left without a crucial product.”

According to Surgeon, Apex has a variety of customers—some with good credit and others with bad. “We had gone to other lending companies for the customers with not-so-good credit and had been turned down. Carmel Financial looked at those customers and said they could help. Carmel Financial has worked out great for us.”

Secondary financing is a win-win for everyone because it allows the dealer to make a sale they otherwise would have lost and the customer can purchase the treatment system they’ve selected.

Dealers that participate in Carmel Financial’s program pay no annual fee, and always have the right to decline a finance bid. “They are in charge of the transaction. We simply help them avoid losing sales that can boost their bottom line,” Sheehan said.

The Dealer Profile was contributed by Carmel Financial Corp.

About the Author

Tracey Sheehan

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