Credit conditions have been far from ideal for the last year or so, as both borrowing and lending have decreased due to the ailing economy. Government and bank officials are still scratching their heads over how to start credit flowing again, but the resolution will ultimately have to involve creditworthy borrowers having access to reasonable loans from viable financial institutions.
The credit crunch has been of particular concern to the HVAC industry, which relies heavily on financing in order to sell new heating and cooling systems. At the recent Air Conditioning Contractors of America (ACCA) convention in Fort Worth, Texas, Bill Hanesworth, vice president and general manager - Air Conditioning Division, Rheem, stated, “Credit is still a problem. My concern is that customers aren’t qualifying for credit.”
More customers than ever may try to qualify for credit this year, hoping they can take advantage of the federal tax credits that are now available for more expensive, high-efficiency HVAC systems. Manufacturers are concerned that tighter credit regulations and lower credit limits may hamper sales of their high-end equipment, but they are optimistic that the tax credits, combined with generous manufacturer and utility rebates, may provide enough incentive for consumers to buy the system of their dreams.
LOOKING FOR SILVER LININGSThe tax credits are one of the bright spots in the industry right now, and they should significantly help sales of high-end equipment, provided the credit is there for consumers. “If you stack the tax credits with a manufacturer rebate, a utility rebate, and maybe utility financing, in many cases, the consumer can buy a 16 SEER unit cheaper than a 13 SEER unit,” said Hanesworth. “I think the utilities are going to play a critical role in the financing issue because they have opened up credit where some other companies are cutting back. It’s conducive for them to bring more efficient units online, so we’ll see what happens. The impact of utilities expanding their financing programs for these high-efficiency systems may be the stimulus the industry needs during the current credit crunch.”
Financing for goods and services in all markets, not just HVAC, has been more difficult to obtain over the last few years, noted James Cadena, manager, merchandising/product manager, consumer financing, Lennox Industries.
“While tighter credit and higher unemployment have played a role in that, they are not the sole reasons for the difficulties. Home values, for example, have decreased, which in turn, decreases the equity a consumer may have available; that can greatly reduce their home equity loans or take them completely off the table.
Frank Fodge, sales and marketing programs manager, Rheem, agreed that the amount of available credit in every industry has tightened significantly, but he’s hopeful that things will be getting better soon. “For the month ending in March, we did show an increase in approvals and the amounts financed over February. We’re hopeful we’ve reached the bottom of the trough, and we’re going to start working our way back up. Our rebates combined with the tax credits will definitely help.”
That being said, Carrier has scaled back the number of financing programs it is offering, focusing mainly on the 12-month same-as-cash offer, which is very popular with consumers. Johnson did express concern over pending legislation, which could hinder same-as-cash offers, but a recent ruling from the government clarified that such programs would probably be allowed to continue, provided that specific protections for consumers are written into the loans.
At Johnson Controls, the majority of loans taking place today involve same-as-cash programs, rather than defined-length programs. “Our most popular program has been six-months, same-as-cash,” noted Andy Armstrong, director of marketing, Unitary Products division, Johnson Controls Inc. “Most consumers need some type of bridge financing to handle an unplanned $8,000 HVAC expense. That is why we feel we’ve seen so much business in the same-as-cash programs.”
Armstrong added that the amount that consumers are financing has increased dramatically since the shift to 13 SEER occurred in 2006. “Prior to 2006, we saw average financed jobs below $5,000; they’ve since swelled well above that level. It seems that the federal tax credit program will also increase the average amount financed.”
Demand is definitely up for products that qualify for the federal tax credit, stated Cadena, which could explain the increasing number of sales of high-end products. “This may be attributed to, in part, the fact that while the financing concerns are certainly prevalent, the desire for more efficient - higher SEER and AFUE - and environmentally friendly products is in many cases, more important to the end consumer. The shift to products that qualify for the federal tax credit is noticeable.”
SELLING A MONTHLY PAYMENTWhile financing still seems to be available in the marketplace, consumers may not know about it because they’re never told. That’s because some contractors are not comfortable talking about money and may never tell their customers about the financing options available. Carol Baker, director of communications, Nordyne, noted that a recent national study showed that about 45 percent of dealers do not offer homeowners assistance with financing.
“This bi-annual study consistently shows that financing is yet to be a major role as a dealer marketing tool among the industry. So, we must first recognize that financing is not a widely adapted selling practice,” said Baker. “Some dealers are baffled about how financing can be integrated as part of every sale they pitch, so education on the importance of financing is still needed among our industry.”
This lack of emphasis on financing is troublesome, stated Baker, given that statistics show that the average financed sale price is often 25 percent more than a cash sale price. “Financing allows the dealer to sell on a monthly payment and allows the consumer to upgrade to a better system. Most consumers are caught off guard by an expensive replacement, and financing options could go a long way in closing a sale. Consumer financing not only helps with the sudden financial burden, but the consumer can get a system that will satisfy their needs beyond just heating and cooling the home.”
Johnson agreed, noting that the more educated a dealer becomes on the tax credits, legislation, and financing options, the better off they will be. “There are dollars out there to be had, and dealers should be looking at bundling them together - the financing, the manufacturer rebates, the tax stimulus dollars - that’s going to help them be more successful.”
Dealers should always offer consumer financing, said Baker, because buyers expect it on any purchase - especially if it is over a few hundred dollars. “It is the consumer’s choice to say no to the dealer’s offer, and it will forever be the choice of a lending institution whether they want to loan money to a consumer.”
Even those contractors who offer a variety of financing options may be running into a brick wall, as the poor economy is keeping some consumers from purchasing higher-end systems right now. Many consumers are just not willing to part with any money and are opting to repair their systems rather than replace them.
Hopefully that will change soon, said Fodge, because everything is in place right now for the contractor to make the consumer a great deal on a high-efficiency system. “We’ll have to see what happens with the economy. I think things are loosening up a bit, so maybe consumer confidence is starting to come back.”