Offering financing can mean increasing your closing ratio and boosting profits, but it can also mean more work for your salespeople and new administrative issues; you may even need new licenses. Once you've decided to offer financing, the more complex problem may be understanding the available options and how they work.
This first in a two-part series defines open-end credit and direct closed-end credit. Part Two (November 2004), discusses indirect closed-end credit.
Open-end, or “revolving,” credit. This is where the contractor has entered into a relationship with a manufacturer, large retailer, or financial institution to be able to offer the consumer access to a line of credit or a private-label credit card with that third party. In a typical open-end credit sale, the contractor completes a credit slip and credit charge application with the consumer when making the sale. The credit is considered open-ended because it allows the consumer to make additional purchases on the line of credit or credit card and to carry the debt for an open period of time, so long as the minimum payments are made as agreed between the parties. In technical terms, this means that the finance charge the consumer is paying can be computed from time to time on the outstanding unpaid balance, as with typical credit cards.
Direct closed-end credit. The customer is required to pay off the debt in regular payments over a set period of time. Many contractors take advantage of direct loans offered by third-party lenders. These direct lenders are usually banks, finance companies, or mortgage companies. The contractor usually completes a credit application for the consumer and forwards it to the direct lender on the consumer's behalf. Sometimes the contractor may present the consumer with the lender's direct loan paperwork for completion and submission to the lender with the credit application. The lender reviews the application and determines if it wishes to make a money loan to the consumer. Very often the transaction takes the form of a consolidation loan, where the consumer has requested (or been offered) not just money to pay off the home improvement purchase but also money to pay off an auto loan or credit cards, refinance a first or second mortgage, or obtain extra cash. The contractor is simply one of the creditors being paid off when the direct lender closes the transaction with the consumer.
As discussed, open-end and direct closed-end credit are almost always between the consumer and a third-party credit provider. (In most indirect closed-end credit, the contractor is listed as the original creditor.) Whether the contractor could potentially be liable to either the consumer or a credit provider for the financing terms depends on the structure of the transaction and the agreements the contractor enters into with the credit provider. — D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.johansonberenson.com), a national law firm specializing in the home improvement industry. Contact him at [email protected].
This article is for informational purposes only and should not be construed as legal advice.
