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WHAT’S HAPPENED TO CONSUMER FINANCING
…”retailers continue to feel the impact of their shrunken profits through the season.” – Wall Street Journal 2/16/2013
At the beginning of September, 2008, eFund Systems was a consumer financing brokerage working with 114 lenders and offering an average of 8 different programs per lender, giving us a portfolio of over 900 financial products and tools for our customer base.
All seemed well. Suddenly, the credit crunch impacted the economy with devastating short term results. Every single lender we had a relationship with, knew of, and could find all shut their doors.
They closed their offices, laid off their staffs (or reassigned them in the case of the banks), and universally announced that they would not reopen until after the presidential election took place so that they would have an idea of what was going to happen to credit going forward.
The election came and went and two, only two, reopened in any capacity. The remainder pulled their funds from the market and closed their business. The industry completely shut down.
The two that reopened in house financing consisted of a single bank with offices nationwide, and a large capital lending group which operated several consumer finance programs. However, their programs had been altered, becoming extremely conservative to the point of effectively curtailing lending activities to almost nothing.
These lenders had the look of making a marketing effort where the idea was to avoid lending if at all possible while still being able to make the claim that they were open for business and accepting applications.
They employed several strategies to achieve these aims, including raising credit requirements so that only ideal customers were approved, raising interest rates to insure that people who were approved would find the loan unpalatable due to the expensive terms, dropping merchants who failed to meet annual minimum funding requirements and refusing any new merchants for roughly a three year period.
Essentially, the only consumer financing taking place in the United States during the fall of 2007 until the summer of 2010 was with companies who had their own in-house financing programs.
The lending laws that were enacted in 2008 and additionally in 2009 have had a strong impact on would-be lenders attempting to reopen, contributing to a lack of consumer financing programs.
Very stringent measures are now in place regarding record keeping, reporting, auditing, and practices that make the investment into consumer financing unpalatable to the core of investors that formed the core of the previous consumer financing industry.
The result of all this has been a consistent stream of consumer financing start-ups who get a few merchants on board with their programs, do a dozen loans or so, then try to “shop the paper” to investors to fund their programs only to discover that the investors simply have no interest at all.
What merchants see is consumer finance companies opening and closing again after only three to nine months of operation. The archaic consumer financing model simply does not work anymore and doesn’t seem close to making a comeback anytime soon, if ever.
- While traditional consumer financing has all but disappeared, other options have appeared to take their place.
The new lending laws have had further impact to curtail customer finance lending, directly impacting in-house programs.
The term “lender” has been so broadly defined in these laws that now anyone extending credit, terms, payment options, lay-a-way program, or even running an accounts receivables program to try to collect late payments is considered a lender under these laws.
The attempt on the part of legislators is to close as many loopholes previously exploited by unscrupulous lenders as possible. In the process they have now turned a great many merchants and medical practices into lenders without them realizing it.
Backing the system up with fines that rapidly peak at $25,000.00 per day, many merchants have run afoul of these laws and been shut down. The court battles regarding the legitimacy of aspects of this body of law are currently in progress.
“If you want to get out of a financial hole, the first step is to stop digging.” – Warren Buffett
While traditional consumer financing has all but disappeared, other options have appeared to take their place. The customer finance market is hungry for options and existing programs that were not impacted by these laws and market conditions have begun to thrive.
As with all things, if there is a need people will appear with solutions. While no credit check financing is not gone forever and traditional consumer financing will likely return at some point, it is quite likely that it will never return to its free-wheeling lending habits of the past and will remain a conservative industry for at least the next decade and probably longer.
Alternative to customer finance programs are expected to slip into the vacated niches and thrive, and in fact are already making their presence known, and are expected to form the new backbone of the customer finance industry. Consumer financing is not dead, just evolving.
- Contributed by eFund Systems
While it is true that the customer financing market may be hungering for and inventing new options in providing easier financing to offer to their clients and patients, the biggest mistake the majority of small business owners make is allowing a growth paralysis to set in mostly due to lack of good information.
There are many great options for small businesses to take advantage of right now. What is sad from a banker’s point-of-view is when a company finds a viable solution and then does nothing about it.
Consider too what one could be inadvertently saying to most of the customers they’ve lost over the last six months due to their inability to buy their services ‘…sorry folks but in reality, I am no different than most of my close competitors. And when it comes right down to it I either don’t care or feel that it’s too much trouble for me to help you buy my services.’
And as far as our economy is concerned, I don’t really feel it has rejuvenated itself anywhere near its pre-2008 financial status. It may at times appear to be better in some respects. But the truth is, more people than ever have marginal credit histories or have had their credit buying power reduced.
Make no mistake; you are losing sales. To stop this unnecessary loss in profits means taking action. Hence, I encourage you to take the needed measures to stop this financial bleeding or accept the fact that you will probably never see increases of 20 to 40 percent that savvy businesses and medical practices are now experiencing.
It should be mandatory for all business owners including medical professionals to take a closer look at these customer finance programs and then make one available to this fast growing yet largely ignored buying market.
In conclusion, it is not surprising to report that most businesses who are instituting this type of consumer financing program are in fact, getting their first approved client the very next day especially when utilizing our no credit check financing.