HIGH POINT — You spend money on promoting your store, work hard to get customers in the door, and succeed in selling them a nice living room set.
But they need to finance the purchase and your primary lender turns them down. Their credit score is too low, or they are deemed to have too little income in relation to the debt they want to take on.
Is the sale lost? Not necessarily. There's a healthy industry of lenders that offer secondary or alternative financing options, helping retailers make sales to consumers with less than pristine credit. In many cases, stores can find a way to extend credit to at least some of those rejected by a primary lender.
Since the recession hit and incomes have stalled or declined for many consumers, the need for alternative financing has grown, according to some in the industry.
"As the economy went down ... the subprime consumer population has grown exponentially," said Judy Munden, director of credit and marketing operations for Tidewater Finance Co., a secondary lender in furniture and a variety of other consumer goods.
"At the same time these consumers are still shopping, they still need furniture and other goods, and they need fair programs for lending," Munden said.
Like a number of other secondary lenders, Tidewater, which is online, only considers consumers that have been rejected by primary lenders. It looks at the usual qualifiers for a loan, like ability to pay and debt-to-income ratio, but also has tweaked the process to bring in certain consumers who may have blemishes on their credit.
"What we do is kind of overlook certain things, like medical expenses or student loan payments not being made, while credit card bills are paid in a timely manner," said Munden.
As with most such lenders, the credit decision these days is automated, so the retailer and consumer know within seconds whether financing is available.
CreditSource, a sales financing platform operated by Source International, has been in business about 20 years and since 2001 has been a preferred secondary financing source with the National Home Furnishings Assn.
Steve Wilson, Source International CEO, said the company works with a number of lenders offering a variety of financing programs to retailers.
"We want the customer to have a good experience so we vet these (lenders) pretty well," Wilson said.
Some lenders will take on more credit risk than others, he said. Traditionally, a secondary lender will approve 20% to 25% of those turned down by primary lenders, and will take on consumers in the lower 600 range of FICO credit scores (definitions vary, but below 640 is often considered subprime).
Use of the online CreditSource system is free to merchants, who work with the lenders to determine any fees or discounts associated with the financing. If a secondary lender turns down an application, it can automatically be sent to a tertiary lender for consideration. A tertiary lender might work on a lease-purchase basis, Wilson said.
In taking on customers with less stellar credit, secondary lenders often limit their risk by offering terms that are less lenient than the extended financing available through primary lenders. Plans vary widely, but may require payments to start within 30 days, or offer a 90-day "same as cash" option.
It's also typical for lenders to charge a "discount" or a fee to the retailer based on a percentage of the purchase price, which often is in the single digits but with secondary lenders can range as high as 15%. At a 7% discount, for example, the retailer would pay the lender $70 to accept the contract for a $1,000 purchase. Retailers look at these costs when deciding which lenders to use.
Global Check Service says its ARC90 program charges a fixed administrative fee of $35 for each sale, and a rate and transaction fee that ranges from 6% and 20 cents to 9% and 30 cents per payment. If the retailer chooses to add the charges to the purchase, the final priced is usually around $100 per $1,000 sale amount.
To determine whether a customer is approved for financing, Global Check looks at more than 70 items to determine whether he or she can afford to make the purchase - including income, length of employment and stability of work schedule, officials said.
"What we did was expand the concept of ‘approved' to include the merchant's own opinion," Global Check official David Sommers said. There are various levels of acceptability that can be assigned to each consumer.
Information on the program is online at www.Globalcheck.com. The program can be used to finance purchases for up to six months, and the company said it hopes to extend it to a year or so in the near future.
One user of the program is retailer Gates Adams, owner of one-store GAC Furniture in Tustin, Calif. Adams is a little unusual in that his no-frills operation doesn't use a traditional primary lender - which also would charge a discount fee, like 4% or 5%, he said.
"People with better credit will have credit cards (to make their purchases), and I'm not going to have to eat a chunk of the sale," he said.
But Adams does use a couple of secondary lenders that don't require a traditional credit check. Of his customers who choose this option, "I would say 85 or 90% of the people get approved," he said.
That's partly because most people who need alternative financing will apply online on the GAC Furniture website, and probably won't even contact the store if they're not pre-qualified, he said. This makes the programs efficient, he said.
One growing trend in alternative financing has been that more stores are offering a rent-to-own option to customers who don't qualify for primary financing.
Just look at the rapid growth of RAC Acceptance, Rent-A-Center's program to place RTO kiosks within conventional furniture stores. The publicly held, Plano, Texas-based company reported a 77% jump in RAC Acceptance revenue to $343 million in 2012, and said the program had 966 kiosks as of Dec. 31.
The program's website lists a number of prominent retailer partners, among them Rooms To Go, Ashley Furniture HomeStores, Conn's, American Signature and about 40 others.
