August 20, 2019 | Last Updated on: August 16, 2023
Updated September 30, 2020 Dealer financing, the practice of offering loans or other financing options to customers, is a straightforward way to increase rate of sales and improve customer experience. While alternative point-of-sale financing options, like buy-now-pay-later, have gained interest auto loans continue to be the most common form of dealer financing. Financing for auto dealerships is among the oldest and most common types of point of sale financing. Dealer financing works because it saves customers the effort of going to a separate lender before car shopping. And, in other cases, the customer might not have a good enough credit score to facilitate a loan on their own. That’s where you come in – you can sponsor their loan and boost revenue from two avenues – the sale, and interest. Here is how and why dealer financing may work for your dealership.
Dealer financing is, in simple terms, a loan that is offered by retailers (you) to your customers. You acquire commercial loans and then sell those loans on to your customers for a profit. You do this by buying the loan for a lower interest rate than you sell it at. For example, if you buy a loan from a third party at a 1.7% interest rate, you then sell that offer on to the customer at a 4% interest rate. This way you can sell more items and benefit from profits gained from the increased interest rate. Dealer financing is also known as an indirect loan.
Dealer financing is a great fit for large purchases, like buying a new or used vehicle. As mentioned earlier, you can sponsor your own financing system where you act as the middleman, and a customer pays a slightly higher interest rate. Not to mention, your customers have the opportunity to buy big-ticket items in-store that they would otherwise never be able to acquire. Ultimately, you are looking to improve your customer loyalty and profits by offering better customer services.
When you offer this financing at the point of sale, you can actually improve the amount of business you bring in. In fact, a study has found that businesses providing these financing options see, on average, a 32% increase in sales. When customers learn that a financing offer exists, they are also far more likely to buy more. For example, instead of buying just a television, they might buy a television and a surround-sound system, because they can pay it off in installments. This strategy is so compelling that the same study as before concluded that the average order increases 75% in value when a business offers financing.
Dealer financing is ideal for businesses that offer large-ticket items. Car dealerships, in particular, have found this business model to be very profitable, and if you are hoping to open up a dealership of your own, this is definitely the way to go. Expensive music or entertainment equipment can be just as lucrative. If your business sells equipment that adds up to thousands or more, then offering financing is a great idea to boost sales. You can increase the amount of high-value sales you make while at the same time increasing the amount customers buy at the point of sale. Encourage this behavior by offering bundle discounts or advertising other items they can buy to complete their set. You will then also make money on the interest rate they pay. Similar to how a bank would make money when lending out money, hiking up the interest rate is a very profitable way to bring in money from alternative revenue streams. The downside, however, is that dealer financing is expensive for the company that offers it. You need to put quite a bit of money down to apply for it, and there is always the risk that the customer could default on their loan. An excellent way to get around this is to put the equipment they just purchased up as collateral, but if the customer does default, the resale value will never be as good. Another consideration is the time involved in creating and maintaining a dealer financing plan. If you’re offering financing yourself, you’ll be spending more time working on customer accounts and negotiating those relationships. And if you’re working with a third party, you’ll be spending time on sourcing that partner, negotiating a contract, buying the loans, and negotiating that relationship as well. You need to work out if offering dealer financing is worthwhile for your business before you invest in it.
There are a few ways that you can offer dealer financing. You can get a commercial loan that will cover the financing costs, or you can partner directly with a lender.
When you work with a bank, you buy a loan from them and then sell it on to the customer. This is the most common form of dealer financing.
Using a loan platform is very similar, except that it can be more expensive to do this. Loan platforms that exist solely so that businesses can offer dealer financing have huge upstart costs, so it is best to wait until they have a starting discount before starting.
Dealer financing can be an exceptionally great tool for your business if your business is in the right place for it. Start-up costs for this practice can be hefty. You need to go through all your options to ensure that the upfront cost and the risk involved are worthwhile, and more importantly that you can afford to extend financing. Generally speaking, you should have a healthy income stream, to begin with, as financing means you will get your money in monthly installments, which can be difficult to budget for if you are already struggling. Done right, however, dealer financing can be great for both business and customer. If you are considering dealer financing through a lending partner, reach out to Biz2Credit to explore the options that may best fit your business.
