More than half of all consumers live paycheck-to-paycheck, said Chris Crocker, who handles national account sales for Okinus. A quarter of consumers lack any savings account. This means when something major goes wrong, they lack the cash to pay for it. This creates a lot of opportunity for HVAC contractors who can help these consumers solve their problem.

“There’s this market out there of customers who aren’t being helped, and I would say that market is growing,” Crocker said.

Easier to Finance Car than HVAC

The number of cash-paying homeowners decreases every year, he said. Younger homeowners have less cash, but they also often have worse credit, thanks in part to already financing everything from automobiles to education. Fewer of these people are growing into a better credit position, Crocker said, as they did in the past. This is due in part to the more volatile path of consumer income. Yet the number of finance sources for these customers remains comparatively limited.

“It’s easier to get a car financed than an HVAC unit,” Crocker said.

Okinus was among several finance companies targeting this demographic that exhibited at this fall’s industry events. EGIA recently debuted Optimus, a finance platform that covers a range of credit levels, including providers that finance consumers with lower credit scores. Matthew Bratsis, EGIA vice president of consumer product, said contractors often avoid seeking finance for customers if they fail to get approved by a prime lender.

“It’s just a messy, uncomfortable conversation,” Bratsis said.

Instead, HVAC contractors offer less expensive option, try to repair the existing system, or even walk away from the sale. Optimus avoids this conversation. It allows contractors to place the consumer with the most likely credit source by doing a soft credit pull.

People rarely want to discuss their finances, especially if they have low credit scores, Crocker said. This makes online applications appealing. It also helps to have fewer requirements. Bradis said part of Optimus’ appeal is there’s no need for documentation, such as paystubs. Okinus ignores credit scores. Its criteria for approval is home ownership, earning at least $750 a month, and having a bank account.

Do the Due Diligence

As with any opportunity, offering finance to lower-credit-score customers does come with a risk. In fact, the credit score reflects that risk. The customers have a history of not always paying their bills. This means finance companies operating in this space need to price that risk with higher interest rates. They also need to have systems in place for collections and, if needed, repossessions.

Crocker said Okinus works with its customers to help them catch up when they fall behind. The company rarely repossesses the equipment. There’s little advantage to doing so, since there really isn’t a secondhand market for air conditioning units the way there is for cars. When a repossession is necessary, Crocker said, it’s never done by the installing contractor.

“Once the contractor installs it, they’re done,” he said.

Still, dealing with this kind of customer does bring extra regulatory attention, said Clay Swears, an attorney with Hudson Cook, a law firm that specializes in different types of finance and credit. HVAC contractors need to perform due diligence to ensure legal compliance from any finance company with which they work.

“The higher rate you charge, the more laws you’re going to be subject to,” Swears said.

It’s important for HVAC contractors to understand the different types of credit. The most straight-forward is a loan. This is when a financial institution provides money to a consumer for a purchase and that consumer pays it back, usually with interest. Loans are the most heavily regulated type of financing, Swears said.

Leasing vs. Lease-to-Own

Then there is leasing. A lease is basically a contract between two entities in which one party (the lessor) allows the other (the lessee) to use some kind of property for a designated period of time in exchange for a set payment. At the end of a traditional lease, the lessee can opt to pay a residual in order to retain the property.

With a traditional lease, the residual is usually fairly large, Swears said. It reflects the projected value of the property minus what the lessee paid during the terms of the lease and any upfront payment. Lease-to-own financing, also known as dollar-out leasing, comes with a very small residual at the end. In both versions, the lessor retains ownership of the property until the lessee pays the residual.

In the eyes of regulators, the two are different, Swears said. A traditional lease is usually lightly regulated, falling under the Uniform Commercial Code. Lease-to-own is more like a loan or installment sale. It’s crucial that HVAC contractors understand the difference and what is being offered to their customers.

“If you do a lease correctly, there can be a lot of benefit,” Swears said. “But there can be a lot of risk if you do it incorrectly.”

Swears said even he finds leasing disclosures confusing. This HVAC contractors need to fully understand these products and make sure they train their salespeople in the details of leasing. Contractors also need to use caution in how they present leasing and other finance options in their marketing materials.

“You want to make the strongest claim you can, and that’s when risks arise,” Swears said.