People who pay for home improvements with a loan tend to spend
30 percent to 40 percent more than those who pay with their own
If you're not helping your customers secure financing, you're
shortchanging yourself. According to a study by Harvard
University's Joint Center for Housing Studies, people who pay
for home improvements with a loan tend to spend 30 percent to
40 percent more than those who pay with their own cash. These
numbers mirror my own experience as a contractor who offered
financing to customers for 20 years.
I found that financing appeals to all kinds of customers, not
just those strapped for cash. For instance, I had wealthy
customers who could easily have liquidated some investments to
pay for the job but were told by their financial advisor not
to, for the simple reason they might not have the discipline to
replenish those investments.
For the most part, I didn't finance jobs myself. Instead, I
educated customers about their various choices and referred
them to the companies that offered those options. To perform my
role well, I had to understand which credit product made the
most sense for a particular customer, and be able to explain
all of the benefits of that approach.
I strongly suggest that you start accepting plastic if you
don't already. On small jobs, many people prefer to pay with
credit cards, so permitting them to do so will raise your
closing rate. But I also had success using this perk to close
large projects, primarily by focusing on the frequent-flier
miles many cards offer. The tactic worked with customers from
all income brackets, provided they liked to travel.
I saw customers balk at the price of a $200,000 remodeling
project, then come round when I asked, "What if we can offer
you two round-trip tickets to Europe?" I'd explain that paying
me with a credit card would earn them enough miles for those
tickets, and advised them to pay the balance with a
home-improvement loan before interest on the card started
coming due. If they didn't have a card that offered miles, it
was easy enough to get one. If their card had only a $20,000
credit limit, I'd offer to take payments in $20,000
The downside, of course, was the 3.5 percent of the sale price
that Visa and MasterCard charged me. I could afford to pay that
charge only if I set my prices high enough. Instead of adding
the amount to each individual job, I would decide how much
credit-card volume I was willing to do, then budget it as part
of my overhead.
Home-improvement loans are typically 10- to 20-year fixed or
variable-rate loans secured by a second mortgage. A creative
way to make this option more attractive is to show the
homeowners how it can help them with other expenses.
The important point with this type of financing is that on a
loan of up to $100,000, the interest may be tax-deductible.
(The homeowners need to check with a financial advisor to
confirm this.) Say they want to do a $50,000 project, but they
also have tuition and car loans with a total debt of close to
$50,000. Interest on the tuition and car isn't tax-deductible,
but if they take out a $100,000 loan and use half of it to
finance the project and the other half to pay off the tuition
and car, they will have substituted tax-deductible interest for
Some banks will work with contractors on same-as-cash
financing, an arrangement in which the customer doesn't pay
interest if the loan is paid off within a predetermined period
— usually 60, 180, or 360 days. The contractor pays
the bank a carrying fee and builds that into the price of the
When the job is done, the bank takes out a second mortgage on
the house for the entire amount, and pays the contractor
everything except the buy-down fee. The buy-down fee depends on
the interest rate, but can range from 5 percent to 9
This is a good tool for homeowners who want to put their house
on the market but need to upgrade the kitchen to make it more
saleable. With 360-day same-as-cash financing, they can pay off
the loan interest-free with proceeds from the sale if the home
sells within a year of when the work is completed.
The downside for customers is that if they don't pay off the
loan at the end of the term, they will have to pay interest
that accrues from the day of the signing. The downside for the
contractor is that he doesn't get paid until the job is done.
As with credit cards, I always built the price of the fee into
This no longer works for as many people as it did a couple of
years ago, when interest rates were at rock bottom. Even today,
though, you'll find customers who have higher-than-market
interest rates, and significant equity in the home.
If one of my customers appeared to be a good candidate for a
new mortgage, I would sometimes suggest that he or she consider
including some money for investments. That could mean borrowing
the money at 5.5 percent and placing it in an investment that
yields 6.5 percent or more, perhaps tax-free.
Partial In-House Financing
While full in-house financing is typically offered only by
contractors with deep capital reserves, even an average
contractor can close some sales by financing part of the job
price. I've had customers who wanted to build a $30,000 project
but had only $20,000, so I agreed to finance the extra $10,000.
If the $20,000 covered the cost of the job, I was basically
financing my profit.
To do this, the client would give me legal permission to set
up a simple LLC that took out a second mortgage on the house.
This loan would have a higher interest rate than the client's
first mortgage, as would be the case with any second mortgage.
I would determine the customer's creditworthiness using numbers
from the credit reporting bureaus, and the client would agree
to pay the LLC for the loan.
Although many customers paid off their balances relatively
quickly, partial financing created an income stream for my
company that I otherwise would not have had. In fact, I used
this approach several times per year over the course of two
decades to develop a nice side income for my business. And I
never lost money.A contractor for 20 years in Denver, Michael
Gorman now runs TechKnowledge in Lakeland, Fla., which
trains contractors in sales, marketing, and