Dealer Financing Can Make a Big Impact on Your Bottom Line
When it comes to offering your customers excellent service, dealer financing is one of the best strategies to choose from. How it works is that you make a profit not only on the product they buy, but also on the markup you add to the interest rate for business loans.
Dealer financing works because, though customers can often get a better deal through their own bank, this takes extra time and effort. In other cases, the customer might not have a good enough credit score of their own to facilitate a loan. That’s where you come in – you can sponsor their loan and boost revenue from two avenues.
What Is Dealer Financing?
Dealer financing is, in simple terms, a loan that is offered by retailers (you) to your customers. You acquire commercial loans and then sell that loan on to your customer for a profit. You do this by buying the loan for a lower interest rate than you sell it at. For example, if you buy a loan from a third party at a 1.7% interest rate, you then sell that offer on to the customer at a 4% interest rate.
This way you can sell more items and benefit from profits gained from the increased interest rate. Dealer financing is also known as an indirect loan.
Why Would You Want to Offer Dealer Financing?
This type of financing is beneficial to both parties and can take a few different forms.
You can offer financing for a big purchase. As mentioned earlier, you can sponsor your own credit card system where you act as the middle man, and a customer pays a slightly higher interest rate. The draw in this credit card system is that customers can get points to use in your store. Another draw is that they might be able to apply for your credit card when they wouldn’t be able to apply for a bank’s card – they can qualify for your card when they might not qualify elsewhere. Not to mention, your customers have the opportunity to buy big-ticket items in-store that they would otherwise never be able to acquire.
Ultimately, you are looking to improve your customer loyalty and profits by offering better customer services.
How Can Your Company Benefit From Dealer Financing at the Point of Sale?
When you offer this financing at the point of sale, you can actually improve the amount of business you bring in. In fact, a study has found that businesses providing these financing options see, on average, a 32% increase in sales.
When customers learn that a financing offer exists, they are also far more likely to buy more. For example, instead of buying just a television, they might buy a television and a surround-sound system, because they can pay it off in installments. This strategy is so compelling that the same study as before concluded that the average order increases 75% in value when a business offers financing.
Should Your Company Offer Dealer Financing?
Dealer financing is ideal for businesses that offer large-ticket items. Car dealerships, in particular, have found this business model to be very profitable, and if you are hoping to open up a dealership of your own, this is definitely the way to go. Expensive music or entertainment equipment can be just as lucrative. If your business sells equipment that adds up to thousands or more, then offering financing is a great idea to boost sales.
You can increase the amount of high-value sales you make while at the same time increasing the amount customers buy at the point of sale. Encourage this behavior by offering bundle discounts or advertising other items they can buy to complete their set.
You will then also make money on the interest rate they pay. Similar to how a bank would make money when lending out money, hiking up the interest rate is a very profitable way to bring in money from alternative revenue streams.
The downside, however, is that dealer financing is expensive for the company that offers it. You need to put quite a bit of money down to apply for it, and there is always the risk that the customer could default on their loan. An excellent way to get around this is to put the equipment they just purchased up as collateral, but if the customer does default, the resale value will never be as good.
Another consideration is the time involved in creating and maintaining a dealer financing plan. If you’re offering financing yourself, you’ll be spending more time working on customer accounts and negotiating those relationships. And if you’re working with a third party, you’ll be spending time on sourcing that partner, negotiating a contract, buying the loans, and negotiating that relationship as well.
You need to work out if offering dealer financing is worthwhile for your business before you invest in it.
How You Can Offer Dealer Financing
There are a few ways that you can offer dealer financing. You can get a commercial loan that will cover the financing costs, or you can partner directly with a lender.
Work With a Bank
When you work with a bank, you buy a loan from them and then sell it on to the customer.
Use a Loan Platform
Using a loan platform is very similar, except that it can be more expensive to do this. Loan platforms that exist solely so that businesses can offer dealer financing have huge upstart costs, so it is best to wait until they have a starting discount before starting.
Some Final Reflections on Dealer Financing
Dealer financing can be an exceptionally great tool for your business if your business is in the right place for it.
Start-up costs for this practice can be hefty. You need to go through all your options to ensure that the upfront cost and the risk involved are worthwhile, and more importantly that you can afford to spread out costs like that. Generally speaking, you should have a healthy income stream, to begin with, as financing means you will get your money in monthly installments, which can be difficult to budget for if you are already struggling.
Done right, however, dealer financing can be great for both business and customer.