Business Funding Secrets
Business Funding Secrets

Funding Retail Consumer Receivables

 

Businesses who sell higher priced retail products and services to the end user can increase sales and profits when they offer to finance these purchases to increase the company’s sales and profits. As with all financing decisions, risk and return must always be considered. One way for a retailer to hedge against the risks of financing consumers, while having the opportunity to increase sales and profits, is to have a funding source that understands the business of consumer receivables.

 

How consumer receivables financing works

            

The retailer (the business providing the product or service) originates the financing for the consumer. The retailer can then maintain a portfolio of consumer receivables, or sell them to an investor or funding company. Banks and home loan companies do the same thing with residential mortgages.

 

Funders purchase the consumer receivable at a discount with a debt reserve set aside. The balance, usually 70-85% of the principal balance on the consumer contract, is provided to the retailer. When the receivable has been paid the debt reserve is returned to the retailer. The length of the contract and the amount purchased will vary with each funder, but usually won’t be more than 5 years or $25,000 for each contract.    

              

If a business owner is already using a national retail consumer financing company, chances are the finance company is buying only “A” credit paper. In those circumstances, the business owner may want to consider using a secondary contract buyer to purchase lower credit quality paper (the “B” credit lender). Keep in mind, these lenders will require a deeper purchase discount and higher reserve; however, the business owner must weigh that against increased sales to customers that were previously turned down because of an insufficient credit score.


By reviewing the margins on the retailers financial statements, the decision to use the consumer receivables funding can be easily arrived at. If it makes more money for the business - do it. If it doesn’t allow the business to increase sales and profits - don’t do it.

 

During the decision analysis the business can also look at:

1.    Are there additional products or services the consumer will need to complement

the purchase, which will further increase the sale and profits of the business.

2.    Some funders also provide “third party billing & servicing.” This will allow the

business to reduce expenses, while increasing cash flow and improving efficiency.

3.    Funders can also perform “collections.” A reputable delinquent account recovery

service can increase recovery and reduce lost revenue. Losses are part of the risk of financing and having the ability to reduce the risk is an important factor.

 

 Benefits of using Consumer Receivable Finance:
    
  Increase retailers cash flow
     Ability to outsource non-revenue generating activities
     Reduce overhead
     Improve receivables performance
     Improve customer relationships


Consumer receivable funding is available for new accounts, seasoned portfolios, and charged-off accounts. Examples of products and services that can be financed using Consumer Receivable Finance:

Piano Sales
Digital Photo
Jewelry
Appliances
Plastic Surgery
Health Clubs
Time Shares
Water Purification
Fitness Equipment
Security Systems
In-Vitro Fertilization
Travel Clubs

When aligned with a knowledgeable funder, a business can provide their customers greater opportunities to purchase the higher priced products and services they desire. To discuss this topic further, business owners and consultants should contact Reiner Mueller at: libertycapital@sbcglobal.net   

               

Tips:
1. With the current credit crunch and constraints on traditionally lending a consumer receivables funding program could provide some needed cash flow to a retailer.
2. Traditional lenders are usually not a source of funding for consumer receivables.
3. Funders specializing in funding consumer receivables can provide new opportunities for business growth.

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