Federal Reserve Chairman Ben Bernanke has been very vocal about the assorted economic woes that are facing the United States. In a recent speech, he noted that financial markets have been under considerable strain since late last summer due to heightened investor concerns about the credit quality of mortgages, as well as other factors, including the weaker outlook for the economy and uncertainties about the exposures of major financial institutions to credit losses.
In a February speech, Bernanke stated banks have become more restrictive in their lending to firms and households. “For example, in the latest Senior Loan Officer Opinion Survey conducted by the Federal Reserve, banks reported having further tightened their lending standards and terms for a broad range of loan types over the past three months. More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth.”
Some of the largest banks in the United States have added their warnings to Bernanke’s concerns by stating that the turmoil surrounding subprime mortgages could be the start of a sweeping lending crisis. In addition, banks are reporting large losses due mainly to the fact that debt-ridden customers are having a hard time making payments on credit cards, auto loans, and home equity loans. The result may be that fewer banks and lending institutions are willing to extend credit, which could be a concern to those homeowners looking to obtain financing for a new heating or cooling system.
GETTING APPROVEDMark “Smitty” Smith, president, Smitty’s Heating & Cooling Inc. Redding, Calif., specializes in residential and commercial HVAC changeouts and new construction. He estimates that about 25 percent of his customers require financing, which they typically obtain through Trane’s partnership with American General Financial Services.
Smith notes that most consumers qualify for manufacturer financing, and those who don’t usually end up using a credit card. He is still concerned about the economic downturn and the issues that may affect financing in the future.
“The credit crunch will affect our business; however, in our area, one cannot live without heat in the winter and cooling in the summer,” he stated. “We will work with our loyal customers to meet their comfort needs.”
It is precisely this need-based scenario that will keep credit flowing to those requiring heating and cooling equipment, said Frank Fodge, sales and marketing program manager, Rheem. “An HVAC purchase is usually not a luxury item. It’s not like upgrading to a larger TV. When people want a new HVAC system, it’s usually out of necessity. Nobody wants to go out and spend $10,000 on a new HVAC system just because they don’t like the looks of the old one. I think the lending institutions recognize that, and they will probably be less inclined to squeeze our industry as they will other industries.”
Rheem partners with GE Money, which typically approves 75 to 80 percent of the customers applying for financing through approved dealers. Being an approved Rheem dealer means being in business for at least three years and having a certain amount of revenue each year. GE Money also runs a credit check on each dealer it approves, which seems to have resulted in more creditworthy customers as well. So far, GE Money has not indicated to Rheem that it will tighten lending requirements, which is good news given that requests for financing through approved Rheem dealers went through the roof in 2007.
Fodge believes more people are seeking financing due to the higher costs of HVAC equipment. “With the 13 SEER minimum efficiency requirement taking place in 2006, it seems that consumers are experiencing a bit of sticker shock when they go to replace a system that may be 10 or 15 years old. When they have to leap to 13 SEER, it’s really more money than they were expecting to pay.”
The higher cost of equipment combined with harder-to-get home equity loans may result in record numbers of consumers applying for financing this year. “I think with the credit crunch, we’ll see more people applying for loans for HVAC equipment this year than we probably did last year. Although as a result of this wider pool of people applying, we might quite possibly see our approval rates drop as a byproduct,” said Fodge.
There are other options for those who do not qualify for regular manufacturer financing. “Those that are turned down by GE Money (which also partners with Bryant Heating and Cooling Systems) are given the opportunity to be reviewed by a second-look company that is willing to finance the majority of those remaining; however it is a higher cost to both the homeowner and the dealer,” stated Valerie Baldwin, manager - national dealer programs and promotions, Bryant Heating & Cooling Systems.
FINANCING OPTIONS EXPECTED TO GROWMark Schneider, owner, Pacific Aire, Ventura, Calif., notes that the number of customers applying for financing has decreased over the years, but he expects that to change soon. The company specializes in residential replacement, and currently 25 percent of new equipment sales at Pacific Aire require financing. That’s down from five years ago when approximately 33 percent required financing.
“We do see a lot of people paying cash or with a check, but the money is coming from their home equity loan. Indirectly, people are financing the job, they just are not using us to get the financing,” said Schneider.
Tighter lending requirements and a sagging housing market mean fewer people qualify for home equity loans, which is why Schneider thinks more consumers will require financing in the future. “More people will want to finance now that they don’t have the home equity option. I foresee the amount we finance jumping back up to 30 to 40 percent. We offer financing on every job, and it is in all of our replacement marketing.”
Many manufacturers also recommend that contractors offer financing as standard procedure. “We encourage Trane and American Standard dealers to include consumer financing with each proposal. In fact, financing was up over 30 percent last year. It’s an attractive prospect to encourage homeowners to consider the highest efficiency systems,” said Dale Green, senior vice president, sales and marketing Trane Residential Systems.
Offering various financing options is what all contractors should do if they want to survive the economic downturn, noted Bruce Matulich, executive director, Electric & Gas Industries Association (EGIA). “We surveyed the best contractors we knew - the ones who were continuously growing their businesses even in a down economy. What we found was that the most successful companies introduce financing early in the sales presentation, so that within a minute or two, they’ve let the consumer know that they have competitive financing solutions that will help make their installation affordable. They disarm the customer right up front.”
Matulich states that the problem with the current financing situation is that contractors usually only offer short-term financing options. For example, many offer six- or 12-month, no interest, no payment financing, which jumps to a 20 percent-plus interest rate if customers don’t pay off the balance within the specified six or 12 months.
Another choice that contractors may want to consider offering is unsecured installment financing, which is a fixed payment program that can be used to finance an efficient home improvement for up to 20 years. “There are a lot of consumers who are monthly payment driven. Everybody has a budget, and everybody knows they can afford a certain amount each month. Fixed-rate, long-term installment financing is a tool that makes energy efficiency affordable for more consumers and enables the contractor to upsell a more comprehensive solution,” said Matulich. EGIA offers this type of long-term financing to its members, which may be utilities or contractors.
Long-term financing may be of particular interest to homeowners who were expecting to spend maybe $4,000 on a new system but instead learn that they will have to pay closer to $7,000. In this situation, a contractor may be more likely to close the sale if he tells the homeowners that they will get a new system that provides better comfort and lower energy bills for $79 a month, rather than presenting the bill of $7,000 and offering no long-term financing. Using various financing options can help manage the sale.
Metavante Lending Solutions’ Retail Financing Solutions (RFS) unit, Wayne, Pa., and Toronto, Canada, also offers fixed-rate term loans for energy-efficient improvements (including HVAC) that have terms ranging from one to 10 years. “The rates range from 9.99 to 14.99 percent, and the amount financed can range from $1,000 to $20,000,” said Matthew Temares, vice president of sales, Metavante Lending Solutions. “Some of our lender partners have relationships with either the states and/or the utility companies and offer special programs with even lower rates.”
RFS is rather unique in that it offers clients an indirect loan origination solution. “We are the only technology solution that also sources business for our lender partners, not only providing the tools to efficiently increase loan volume at a reduced cost, but also helping our lender partners source the dealer/installers,” said Temares.
The more financing solutions that are available, the better, because Matulich sees that customers will soon be demanding more comprehensive financing options. “Those contractors who are just selling six- and 12-month financing options are going to be at a disadvantage to those contractors who are leveraging long-term installment and selling low monthly payment. We really encourage contractors to leverage both and then provide the optimal solution to their customers.”