The ability of consumers to obtain credit is an important driver of the U.S. economy, as it stimulates growth by allowing consumers to purchase items they may not be able to pay for with cash. Obtaining credit is especially important for those who need to purchase big-ticket items, such as heating and cooling systems.

But qualifying for financing has become more difficult for many Americans, particularly those who have lost jobs, taken pay cuts, or gone through bankruptcy or foreclosure. All of these issues can lead to lower credit scores, which may prevent consumers from obtaining loans through traditional lending institutions. This is why some contractors are looking not only to their regular lenders for financing options, but to other sources as well, including local credit unions, subprime lenders, and even themselves.

Traditional Financing

When it comes to financing options, contractors often look first to the manufacturers who can offer lines of credit for homeowners through large lenders, such as GE Capital or Wells Fargo. Lennox, for example, has a relationship with GE Capital, which offers private-label revolving credit accounts for homeowners.

According to James Cadena, manager of merchandising, advertising, and promotions, Lennox Industries Residential, “Rates on these accounts vary from a period of no or deferred interest for as little as six months to low APR rates for the entire time. In addition, 100 percent of the job can be financed with no down payment required.”

It is important for contractors to realize that consumers want to know about their financing options when purchasing a new HVAC system, noted Greg Lowe, relationship manager, home improvement industry, GE Capital’s Retail Finance business. “In a study we recently commissioned, we found that the availability of financing drove the final choice of a contractor for 40 percent of all home improvement shoppers surveyed.”

Because so many consumers — and by extension, contractors — rely on financing, GE Capital’s consumer financing programs have been designed to be easy and simple to use, said Lowe. “Our financing programs offer something for every type of consumer — from those homeowners in need of greater purchasing power to get the HVAC unit they really want, to homeowners who want to protect their cash flow while leveraging ‘someone else’s money’ for a limited time.”

Using someone else’s money is particularly important in today’s environment, as many consumer budgets are stretched. “By providing access to special financing, homeowners are able to get the unit they need without tying up other credit cards,” said Lowe.

In deciding whether to provide access to special financing, GE Capital Retail Bank uses a variety of factors, including credit history and the consumer’s ability to pay. Inevitably, some consumers will not be approved for financing, said Lowe, and in those cases, many HVAC contractors have alternative financing sources available, or rely on the consumer to arrange payment in another way.

Cadena noted that Lennox dealers historically have had multiple sources of financing available, with one being a local source that may have direct consumer knowledge that a national source would not have. “A ‘second-look’ option for consumers who may have a blemished credit history is also becoming more mainstream, as generally the credit quality of the consumer has suffered over the last four years.”

Other Alternatives

One of those alternative sources of financing is TURNS Financing Services, Atlanta, which partners with lenders that offer financing to homeowners with less-than-perfect credit. Company CEO, Thad Joseph, noted that his goal is to be able to offer financing to every homeowner who wants a new HVAC system.

“If customers don’t qualify for prime financing, they can access near-prime and subprime financing through contractors using TURNS Financing Services,” said Joseph. “Our services are based on the Lending Tree model, so contractors can log onto and submit a single, short credit application on behalf of their customer.”

Once the application is submitted, TURNS instantly displays the financing programs for which the homeowner likely qualifies. The contractor can then review the financing options with the homeowner and select one. The homeowner can then formally apply for the selected program, and if approved, financing can be closed right then and there. Joseph added, “We offer homeowners a wide range of programs, and we make applying for and closing financing easy.”

As with other lenders, rates, amounts, and lengths of loans at TURNS vary based on credit. Subprime borrowers, typically those with low FICO scores and/or higher debt-to-income ratios, may be offered amounts between $3,500 and $5,500, depending on income. For these homeowners, terms of 24-36 months are typical, with APRs as low as 14 percent and a max of 18 percent, noted Joseph. Near-prime borrowers can usually finance between $4,500 and $7,500, depending on income, with terms of 36-60 months, and APRs between 12 percent and 15 percent. Prime borrowers can get financing of $25,000 or more, depending on income, with terms of 48-72 months and single-digit APRs.

“People in severe-weather environments that need heating and cooling and can’t find financing will continue to repair older, inefficient systems and remain burdened with higher-than-necessary utility bills,” said Joseph. “A lot of these homeowners applying for financing have FICO scores below 640, but we’re still able to find financing for many of them.”

And if all else fails, contractors may want to consider financing customers themselves. That’s what Ron Ford, owner, Sierra Air Inc., Reno, Nev., decided to do three years ago, when one of his customers went through bankruptcy and could not obtain financing for a new HVAC system. “About 80 percent of our customers qualify for standard financing, but for those who don’t, we offer in-house financing. It’s the right thing to do, and it’s been a wonderful sales booster for us.”

The in-house financing program has been so successful that Ford actively advertises the opportunity whenever he can. “If you do something well, you might as well market it. We’re the best customer-service company in the Reno area, and we market that. We also market our in-house financing program, which attracts a lot of new customers. It doesn’t mean we offer the program to everyone, but we have it, and we want to let people know about it.”

Ford does not require customers to fill out a credit application in order to qualify for in-house financing; instead, he and his sales team work out terms based on a customer’s individual situation.

“We charge 12 percent interest for riskier customers and 9 or 10 percent for more stable folks. We usually like to get 25 percent down, but we’ll accept whatever amount they can afford to pay,” he said. “Every deal is a little different, as some people may have $1,000 to put down, while others may only have a few hundred dollars. Our largest install job loan so far has been $13,000, and service ticket repairs range from $150 to $750.”

Ford makes what he calls a handshake deal with customers and works out a monthly payment agreement that will not put too much burden on the family. The customer only signs the estimate contract for the new system as proposed by Sierra Air. About 80 customers have taken advantage of the in-house financing program thus far, and every month, they are sent a statement with a self-addressed stamped envelope for return payment. Only one customer has defaulted since Ford started the program, and overall, it has been a huge benefit for his company.

“We’ve been thriving the last two or three years, while many of our competitors are gone or are barely hanging on,” said Ford. “I have been told by a few suppliers that our competitors think I’m nuts for offering folks a financing alternative, but I’d say they are just not as trusting as I am. I also put trust in my comfort advisors and service technicians, as they make the real decision as to which customers are offered the in-house financing program. Anything could happen in the future, but as well as this in-house program has worked for both the company and our customers, I’m pretty sure it is here to stay.”

Publication date: 1/28/2013