Better Business: Offering Credit to Your Customers

Apr 1, 2010

If one of your customers is getting a large job done at your shop, should you provide the financing? With the proper cash flow, credit checks, employee training and promotion, this could prove to be a smart move for your business.

When a customer with a valuable classic car came to Vital Wax Detailing & Restoration in Fort Wayne, Indiana, to get some work done, he hoped to get the project financed through his bank. The bank turned him down but Ric Sorg, co-owner and operations manager of Vital Wax, agreed to finance that customer, as he’s done for other customers.

“The jobs that I know I’m going to be able to maintain the cash flow, we [will finance],” Sorg said. “I cut the bank out of the situation if at all possible because if they’re going to charge [the customer] 10 percent, I’d just as soon have that 10-percent extra in our pocket [because] it essentially increases our margin.”

Cash on Hand

Vital Wax has been in business since 1978 and does everything from simple vehicle care to complete restorations for cars, boats, RVs and even planes. This background has provided the shop the capital necessary to finance customers, a key consideration for any business wanting to start a financing program.

“[The] first thing they’ll need to address is, ‘How much more cash or capital am I going to have to have?’ because [if] they’re going to be playing the role of financier, they’re going to have to have a bigger base of capital,” said Norman Scarborough, professor of entrepreneurship at Presbyterian College in Clinton, South Carolina.

“The second thing is they’re really going to have to pay attention to cash flow because when you start financing, it’s going to put more of a strain on your cash flow.”

“You really have to make sure that you’re prepared for this, that you have the capital available and that your cash flow can withstand the time lag,” Scarborough continued. “You’re going to be selling a product basically up front and then you may not get paid for it until much later. Can your cash [flow] withstand that time lag?”

Risk Assessment

Running a credit check on customers that you are considering offering credit to is one way to protect your business.

Offering credit to customers isn’t new for retailers, but today’s economic environment is presenting new challenges.

“About 50 to 100 years ago, a small retailer could put a group of customers on the books, but they knew them, they knew their families and they’d been dealing with them for years, so they took a quiet risk,” said Eugene Fram, professor emeritus at the E. Philip Saunders College of Business at the Rochester Institute of Technology in Rochester, New York.

Sorg of Vital Wax said he protects himself against potential risks in a number of ways.

“I run a credit bureau: do they pay their bills, that’s the main thing,” he said. “It doesn’t matter how much money they have coming in, if they’re not paying their bills in a timely fashion, they’re not necessarily going to pay you on time, and that can really throw us in this industry a big curve.”

Experian is one of three credit bureaus retailers can join to get credit reports for customers they’re considering financing.

“We provide the information on a consumer’s credit history to an organization to help them determine [if they’ll finance a consumer],” said Melinda Zabritski, director of automotive credit for Experian. “What the information does is it gives the lender the consumer’s background for them to evaluate and make the decision.”

One piece of information provided in the credit report is the credit score, a measure of that customer’s credit worthiness.

“If you look at your credit score and your score is 700, that 700 is tied to a certain expected risk, so [lenders] look at all the consumers who score 700 and know there’s going to be a certain percentage of those consumers who will default,” Zabritski said. “We provide the scores that interpret that consumer’s history to then help dealers make decisions on what they’ll finance.”

That score can safeguard your business.

“If you look at the credit history of customers, it tells you an awful lot about how likely they are to repay you-if they’re paying their bills on time, then they’re likely to pay you on time,” Scarborough said. “If not, you may want to think twice about lending the money to that customer because … if you have too many deals [that] go uncollected, that will destroy your company’s cash flow [and] can put you out of business in a hurry.”

Support Staff

When starting and running a financing program, it’s essential to seek advice from legal and accounting experts. Having a point person in-house is also important.

“You’ll have to have a finance and insurance manager,” Scarborough said. “If you’re going to get into financing in a big way, many businesses find it helpful to have someone who is experienced in that [and] knows how to close a deal.”

Educating your employees on your financing program policies and procedures can benefit your business and customers.

“[The salespeople] have to be knowledgeable or [there has to be] at least one person in the store to whom the salesperson can bring the customer to get servicing questions answers and explained,” Fram said. “It does you no good in terms of your brand reputation to provide financial surprises later on. [The customers need to] know what interest rate they’re paying per year and all the other disclosures.”

“Basically what [employees] will do is they turn that stuff right over to me and let me handle it,” said Sorg, who is the point person on financing at his shop. “[They] have been educated that when someone inquires about financing, they know to turn it over to the proper personnel.”

Setting Your Business Apart

If you decide to offer financing, that program can help your business distinguish itself from the competition.

“Retailers in every field have to differentiate themselves from competitors and offering financing is one way of differentiating one store from another because -¦ it is not a common practice,” Fram said. “It’s especially important in this day and age where credit channels are very tight, where people may look to the retailer to help them finance.”

Once you’ve launched your financing program, it’s important to market it to potential customers.

“You have to promote the service to let people know that you offer the service and how it operates,” Fram said.

Vital Wax tells potential customers about its financing program on its signage, business cards and website.

For customers already in the store, Sorg has posted another sign that may get them talking about financing.

“I’ve got a sign [that] says, ‘Due to the current economic conditions of bank closures, bankruptcies, slow pay and no pay, all jobs are payable upon completion. IOUs, PO numbers or your word are not accepted as forms of payment. Please make arrangements for payment at delivery as we are feeling the effects, too,'” Sorg said. “That gets people [thinking], ‘Maybe I should be making some arrangements here before I start playing around with this idea [for my car].'”