I have been thinking about how the industry can possibly spur sales during this economic slowdown. It came to me recently when a manufacturer was sharing with me a story about sitting in an orthodontist’s office. Every parent in the waiting room is on the same payment plan for their straightening their kids’ teeth. Everyone. The insurance company pays $1,000, and then the parents pay $1,000 down and $200 per month for the next three years. Total = $5,600. The orthodontist touts it as “interest free,” but in reality, if you pay the bill upfront, it’s only $5,000 total. 

Here’s a radical idea: Integrators should start subsidizing/financing cookie-cutter systems - just like orthodontists. For a $12,000 installation, for example, have the homeowner put down $5,000 and then finance the remaining $7,000 over a three-year period for $200 per month.

It has worked well for nearly 30 years in the alarm business, ever since Brink’s first introduced the mass-marketed, subsidized installation in the mid 1980s. Brink’s did it for the monthly monitoring; its breakeven point was reportedly around 20 months, if I recall.

I know it sounds sleazy. And for many dealers on the high end, it surely is not a realm in which you want to play.

Also, it’s not conducive to positive cash flow when you first start out. You need to be well capitalized to do this. If you have a strong recurring revenue stream from monitoring or service contracts, this leasing concept is much more attractive.

I can see some big entity, like an ADT or Brink’s, doing this in the home entertainment business. Tell me I am crazy.

Jason -

I signed on with a finance company a couple of years ago. Since then, I’ve had exactly one client ask about financing - and that client ended up paying by credit card.

I also have some restrictions with the financing company that make it harder for a smaller integrator to use them. Specifically, they don’t fund me until the client signs off.

What that means to me is that I don’t get any money until the client agrees that I’m all done - any nitpick, even if it has nothing to do with my work or my products, can delay payment to me. This makes financing pretty much impossible for me for large, longer-term projects, where we’re working with other trades that may hold up our projects and payments. It also exposes me to the occassional client who forgets (or doesn’t care) that I need to get paid to stay in business. These people can kill my business in a heartbeat, by tying up cash or credit that I need to fund other projects.

I could charge a cash (or check or CC) deposit, but the market will only bear so much - after all, why finance a project like this if you’re only financing a small amount? I suspect the market would bear somewhere between 10% and 25%.

In contrast, my billing practices get me either 70% or 100% of the payment up front (30% on project signing, 40% thirty days prior to start, and 30% on completion for most jobs - for smaller jobs or jobs where I have very low margins because I’m competing with a large chain retailer or hybrid, I take a 100% deposit, just like they do). This means I can cover my hard costs (equipment and labor), and I’m only risking profit and/or a small amout of hard costs. Now, I understand that the deposit isn’t mine - and I handle that in my accounting system. But I have a much better cash flow model, and much less risk.

Finally, I suspect that the economy is causing people to take on less debt, not more. As a personal example, I recently did some remodeling in my own house. Rather than take out a loan for it, my wife and I set aside the amount we needed, and paid in cash. Of course, I don’t have any real evidence for this - any chance you guys could dig into that if you do a story on it?

Thanks -
  Rob

I think that going through a finance company only creates more of a cash flow burden which none of us needs, even if we could possibly make a sale we would otherwise loose.  Probably better to loose the job than take on the cash burden.  On the otherhand, I don’t necessarily think of the traditional financing model in what you have described.  I imagine a scenario where we can sign up customers for recurring payments on services Much like an alarm monitoring monthly service payment, we could create a monthly payment for services.

Or, more in line with what you are suggesting.  If you’ve been in business for more than 2 years and been working pretty consistently, you’ve undoubtedly built up some inventory or overstock.  Maybe build a “value engineered” home theater system where a family could get a flat screen and surround sound with $1,000 down and $75/month.  After x months they own the system, during the payments the system is covered completely and if the customer wishes to continue to have the system “insured” beyond that date they can continue to pay monthly some determined amount where comparable in stock parts would be used to maintain their theater.

However, it would be a difficult sale in this economy to convince someone to commit to a monthly payment for non essentials.  Then again, cable/satellite/internet is non essential and almost everyone has it.  Maybe tie in an offer for whole house technology support on ALL equipment and services as a value add.  Have a disclaimer, but it might make the customer feel warm and fuzzy to know they have the local A/V geek only a phone call away to bug about the TV, phone, computer, iPod… etc.

Thinking out loud - or through the keyboard… morgan

I’ve been in business for almost 3 years, and I have small parts in excess inventory, but certainly not any major components such as displays, receivers, or even speakers - those get purchased on a per-job basis, and I never have any left over! . Those are also the big-ticket items that a smaller guy needs to cover in the initial deposit. Even under the best terms I can get through my vendors, I have not more than 45 days to pay for that stuff.

Honestly, I think we’re better off selling a traditional service plan - at least with the finance company, I’ll get my revenue eventually (within a few weeks) - I just have to make sure teh client is happy.

But to self-finance - wow, that’s really tough. That means I’m now a bank. I have to deal with a lot of additional overhead that I don’t have now, including legal paperwork, collections, monitoring those monthly payments, etc. as well as the risk that clients default.

As I’m in the middle of formulating my service plan right now, I’ve already wrestled with these issues to some extent - and I’ve decided that service plans are to be paid up-front in full, and by the year/2-year period. That’s actually the same model Best Buy uses for their extended warranty and service plans, so clients are already expecting that model.

I understand where you guys are coming from. I won’t speak for anyone else, but I seriously don’t want to take on any more financial risk now than I have to. The key to staying afloat right now is to ensure that I can keep advertising and to keep my cash flow moving, not to take on more debt.

Thanks -
  Rob

I have used a finance company for 18 years. I use the finance company as a sales tool to cover the gap between what the client originally thought they would spend and the actual proposed amount, I also have used it as tool to have the client commit to the entire purchase using a carrot of ‘no interest for 6 or 12 months’.
Over the years the finance company has changed their policies in regards to when they will release funds. In addition, the bigger the job the more closely they watch the sale. For instance if I finance a replacement TV for a job that I did five years ago and finance a blu-ray player with it, I treat the sale as cash n’ carry and so does the finance company, which means they usually don’t call the client. For a retrofit job where the sale amount is, for instance, $21,532.00 the finance company wants to speak with the consumer and make sure they are happy with their purchase before they release funds. So in that specific instance the client must agree to provide positive feedback to the finance company when they call. So I inform my client that the finance company will be calling in 2-3 days. If there’s any pre-wiring to be performed for this client I schedule that work as my schedule permits, however I do not schedule anything beyond that at that time.  Once the finance company calls the client and the client confirms he’s happy, the check comes to me and then I order any materials that I do not have. I schedule the remaining work and when the materials arrive we complete the installation.

For sales that are not being 100% financed, where the client is merely financing a portion of the job, let’s say a change order, an installment or perhaps an overage, I simply figure out what products equal the desired finance amount and create an invoice for those products. I never use this method for a down payment on a job that requires immediate work or to finance a pre-wire portion of a job. But I have used it for change orders to add televisions, remote controls, additional rooms of distributed audio. This is how I do it,  I only write up products that I’ve either installed already but I haven’t sold to the job yet or I write up finish phase products that I already have in stock and will be delivered and/or installed in the next few days.  My finance company gives me 30 days on an approval to process the sale without redoing the credit approval process. So when I meet with a client who may potentially use financing on an existing project I make sure I can process the installment within 30 days before I suggest this process. I guess the biggest use that I have garnered out of the finance tool for new construction or long term projects is change orders. You have to be careful though, my astute clients already know that your construction loan has certain credit criteria and when you convert the construction loan to a traditional mortgage your credit criteria is re-examined. If the client is not using the construction loan to provide for my future draws then I take an extra step to discuss their global credit picture. Depending on the strength of their credit portfolio a financing inquiry and purchase may lower their score, so I always discuss with the client what other financing they have done since the home construction or remodeling project commenced. If they’ve done alot, I’ll advise them to speak to their mortgage originator of the permanent loan to advise them prior to me processing the financing application. The originator has a stake in the perm loan, he’s making sure the client can close on their perm so he’ll be brutally honest with his clients. If the client can’t meet the criteria, then we don’t proceed and since I don’t perform change order work until it’s paid for then I’m not out any materials or labor, just sales time. In most cases though, a credit card or check book comes out if the client wants the benefits of whatever the change order will provide to them. I just added three $700 Ipod docks, programming and installation labor last week to a job using this exact method. I wrote up the docks with labor as a seperate sale from the contract, I included a seperate note to the homeowner explaining our warranty on these products will commence upon substantial completion along with the rest of their electronics.

We use Citi for financing customers. We run package deals with 24 and 36 months 0% interest and that campaign generates about $30k per month for us on top of normal sales. People seem to like it, I even find that the ‘cash’ customers often go that route. It cdoes cost a percentage fee to do this, but we make sure to work that into the deal.

If clients cannot pay the bill for their luxuries, they are not my clients. I’m nobodies bank. yo had two key words that make me run.. “sleazy” and “radical”. I think you answered your own question.