The How To’s of Retail Financing - Finance
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The How To’s of Retail Financing

Written By Mary Seaman

Article Date: 07-01-2005
Copyright (C) 2005 Associated Equipment Distributors. All Rights Reserved.

An increasing number of dealers are offering retail financing, which can and does improve profitability.

Dealers that offer retail financing have the opportunity to not only increase cash flow, but to create a profit center that is capable of keeping the company afloat when a business cycle hits bottom. “One of the first people that trained me in this business 30 years ago,” says Ron Riecks, executive vice president and business leader, construction vertical, CIT Equipment Finance, “said the dealership that controls the financing controls the sale. For 30 years I’ve seen that to be true thousands and thousands of times. If dealers are proactive in controlling financing, they will control more sales in their area, which drives the bottom line.”

Dealers have a variety of options available to them for providing retail financing to their customers. While some dealers turn to captive finance companies with the manufacturers they represent, others do not have that option available to them and leave their retail financing to finance companies. (See AED’s 2005 Membership Directory pages 80-86 for a list of finance companies that specialize in working with dealers to create attractive financing options.)

However, an emerging trend reveals dealers creating retail financing programs of their own. Three years ago, Tyler Brandt, president of Vermeer Northeast in Castleton, N.Y., hired a finance manager whose sole responsibility was to oversee the retail financing end of the business. Within 21/2 years, the program hit its stride, and Vermeer Northeast expects to generate roughly $500,000 in income in 2005 from retail financing, and they expect a 50 percent increase next year. Soon, the company expects to be making a million dollars a year – on financing alone.

Brandt says he stumbled into retail financing almost by accident. He went into his local auto dealership to talk to Paul Jerominek, who had handled his financing there, and discovered Jerominek had quit his job days earlier. Brandt hired Jerominek to run Vermeer Northeast’s retail financing program.

“The reason we started this was to get a better turnaround time on our paper,” says Brandt.

The program wasn’t an instant success. Despite Jerominek’s bank contacts, it took roughly three months for the program to start picking up. Midway through the second year, Vermeer Northeast’s retail financing was a money-maker.

Getting Started
The first obstacle the company faced when starting the retail financing program was getting sales reps on-board.

“We really had to spend a lot of time one-on-one with the sales reps,” says Brandt. “They thought they were going to lose control of their transactions.”

The credit approval is run in-house, starting on day one. Rather than sell first and then get the credit application, Vermeer Northeast does the credit check first and makes sure the potential buyer is qualified to pay for the equipment. It costs them $4 to $5 to pull a credit report.

Another benefit of having a dedicated finance position is sales reps don’t have to be the “bad guy” to their customers if there is a credit issue.

Jerominek can discuss a customer’s credit with them in a way a sales rep can’t. It’s easier for him to take that role on and let the sales rep remain friends with the customer. It definitely makes the sales rep’s life easier.

“Once the sales reps realized I wasn’t there to take over their deals,” says Jerominek, “but rather to enhance the ‘smoothness’ of them, they were all on-board. Now, they can make three to four sales calls in a day, when before they might have made two.”

Prior to handling their own financing at Vermeer Northeast, it took roughly a month to process the paperwork and get the deal funded and the company was out as much as $3 million on 35- to 60-day old equipment.

Now, Vermeer Northeast knows within 15 minutes of submitting the credit application whether the customer is credit worthy or not. If he is, the application is faxed to whichever bank they know will approve the loan quickest.

Vermeer Northeast also allows customers to fill out credit applications online and print them as pdf documents. Documents can also be e-mailed to the salesmen who prints them out in their trucks.

“A lot of times, we have our money within a few days,” says Brandt.

In the past, customers would say they had to go to the bank before completing the sale. Jerominek says they wouldn’t know when the customer went to the bank or what the bank had said. In the mean time, they had machines out with the customer.

“We don’t do that anymore,” says Jerominek. “We don’t allow the salesman to let the customer operate the machine if they’re not financing with us. When we do financing, we’re in control, we know they’ll get back to us in two hours, we’ll have the documents in 24 hours, and they’ll be signed in another 24 hours. We’re controlling the process. Deals used to get stretched out for months; now it’s condensed to three or four days.”

All of the financing Jerominek does has a fixed interest rate. The interest rate to the end user is determined by his credit score and a host of other factors.

By creating their own program, Vermeer Northeast was able to improve cash flow. Now instead of waiting 45 days on equipment receivables, it’s three days from application to the day it’s funded.

“It allows us to maintain a ‘fresher’ used equipment inventory,” says Brandt. “We increased cash flow and created a profit center.”

With the success of the initial program, last year Vermeer Northeast created their own in-house brokerage called NYNE Equipment Finance. In addition to financing their own equipment, they also handle financing for other dealerships and other Vermeer dealers across the country. They pay commissions to dealers that give them referrals. Vermeer has also started helping other dealers establish their own programs.

“We’ll go and help set up dealers because it is an unbelievable financial opportunity,” says Brandt.

Currently, NYNE Equipment Finance is actively seeking out new business.

“I’m not a banker,” says Jerominek. “I’m a finance rep who understands the needs of our customers and the equipment dealer.”

Brandt and Jerominek recommend the following steps to dealers who want to set up a retail financing program:

Step 1: Find the best person for the job.
For dealers looking to start their own programs, finding the best possible person is key. And any dealer that wants to offer retail financing should be big enough that they can justify hiring someone. The main priority of the finance rep should be to move metal.

“Paul [Jerominek ] had so many contacts already he was able to get us rolling pretty quickly,” says Brandt. “He knew the steps to take and I didn’t have to give him much guidance.” As Vermeer started doing more financing, they sought out other banks and institutions to work with.

Pick someone who will work well with your sales team. You need a rep that’s adaptable. You need someone who’s able to communicate with the customer on sensitive matters.

Knowledge of the construction industry is not immediately important.

“I’d never heard of a brush chipper,” says Jerominek. “I was in the car business 15 years. I make customers the priority, second is the finance world and finally the machinery.”

Availability is also key. Your finance manager must have a cell phone and be available to be reached 24 hours a day, seven days a week. Financing is very time-sensitive, and a lot of reps work with a sense of urgency. If they call the finance manager, they have to be able to reach him or her.

Step 2: Your finance manager should devote all his time to financing.
“The biggest challenge we faced was to take some of the control from the salesmen, who previously did the finance paperwork,” says Brandt. “We had to take it away from the salesmen and give it to the new finance manager. It took us a while to get them convinced they didn’t need to do it.”

In time, the sales reps saw how much more productive they could be if they weren’t talking to finance companies and doing paperwork, and could use all their time to sell more equipment.

Once the credit applications are signed, the sales reps are done with the deal. Jerominek remains in contact with the customer until the deal closes, and the salesmen can go on to the next sale, which makes them more productive.

Before the program demanded all of his time, Jerominek handled collections for Vermeer Northeast, with the caveat that if a finance application came in, he put collections aside and handled it. He was paid a commission for doing the financing, but not the collections.

“The person put in place to handle the financing really makes a difference,” says Jerominek. “I’d say any dealer that is doing $10 million or more should have an in-house rep. Our finance program is built on dealing honestly with the banks, efficiency and zero delinquency. It creates better interest rates, gives the customer a better rate, and we still make our commission on the deal.”

Step 3: Be patient. Allow time to develop the business.
It took time for Vermeer Northeast to get great rates to pass on to their customers.

According to Jerominek, because of the volume NYNE finances, they receive a more competitive rate than a dealer that sells $2 million to $3 million in equipment. NYNE finances close to $30 million.

The Most Common Mistakes
The biggest mistake would be to start the program and think you’ll make a million dollars the first year, according to Jerominek.

“It has to be grown slowly and gradually,” he says. “You’ve got to have the comfort and confidence of the sales staff. If the sales reps aren’t on board, it won’t work.”

According to CIT’s Riecks, one mistake dealers make is not having a good financial relationship with a strong finance company.

“I’ve heard hundreds of horror stories of dealers working with small local leasing companies or a local broker,” he says. “Dealers need to pick financial partners that are experts in their businesses and that have demonstrated a commitment to it through all business cycles.”

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Article Categories:  Financial  »  Management