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Equipment Financing: Overcoming the Barrier of Cost

Originally published
Originally published: 5/1/2024

Picture this scenario: You’re standing in line at the bank when a woman comes behind you. She starts a conversation and mentions she is on her way to the airport to get away from things. She says her husband is leaving her, and she is unhappy.  Then she says, “See that red car out there? It’s a new Maserati MC20, and he paid $275,000 for it. It’s his pride and joy. However, I’m going to teach him a lesson. I’ll sell it to you right now for $15,000 cash to pay for my trip. That’ll teach him not to mess with me.”  You are flabbergasted! It is the car of your dreams, but you only have $7,000 cash in the bank. You suddenly realize that you must pass on the deal of a lifetime since you don’t have the money to take advantage of this incredible offer.

So, what does this have to do with air conditioning? 

We all tend to focus on getting the best deal for the customer, but it doesn’t matter how good the final price is if the customer has no chance of coming up with the money.  Lending Tree maintains that 49% of Americans can’t cover a $1,000 emergency expense with available cash.  But the problem is that we have all been taught to use the Good-Better-Best method for sales where for $12,000 you can get a 14 SEER2 system but for only $15,000 you get a 2-stage compressor. We might as well say it is $100,000 because not everyone has that kind of money available. So why do we start our conversations in this manner?

As HVAC professionals, it's our responsibility to ensure customers have a positive experience with our services. We should also help them find ways to afford our services.

We must explain to them that this is the third largest purchase they will typically make in their lifetime; a house is first (which they finance), a car is second (also financed) and an HVAC system is third (which logically they should finance).

So, what options should you offer for your customers besides cash?

Of course, you must offer a credit card payment option. Do not worry about the fees – work with the lender to negotiate the best rate you can for your team. The increase in business will more than cover this added cost.  Some people may wish to use a credit card if they have other benefits tied to it such as mileage or cash back rewards. This works well if people have money to pay off the card since current interest rates are well above 20%. 

Technology continues to change, so look into options such as Apple Pay Venmo and PayPal, especially for service. If you are unfamiliar with these options, find a member of your team who is a Gen Z to explain it.

The majority of add-on replacement sales will be long-term financing. Never self-finance a customer – you are not a bank. You should have at least three options to offer your customers depending on their needs. They are roughly as follows:

A Level Credit
FICA rating of 750 and up. These companies offer the best rates but are selective in their approval process. Often manufacturers and utility companies have tie ins with special arrangements for these types of companies. They often have special promotions (24 months same as cash). These companies use specific analytics in making their decisions and are able to generate approvals quickly. However, there is often minimal human interaction, and data drives the decision.  These are typically an unsecured loan.

B Level Credit
FICA rating of 675 to 750 ( a rough guideline). Many of the A level companies will have this fallback option but at a much higher interest rate. They often will present this option if the customer does not qualify for their best rate. In this category are “second look companies.” They use the traditional method of a loan officer looking at all aspects of the loan. They will talk with the applicant and discuss their potential to pay. These loans may be secured and may require a UCC-1 form. Interest rates will be higher than A level.

C Level and Lower
There are companies that will accept very high-risk customers. These are secured loans  and part of their contract discusses repossession. The implied interest is high. They need documentation and an interview with the customer. However, they are able to provide financing for customers who have no other options. As a side note, my personal experience has been that the people needing these loans are not typically low-income people but higher income people who are overextended or “house poor.” They cannot qualify for credit, but they can afford high monthly payments since they have solid income levels.

In all cases, develop a relationship with all of your banking and financial contacts.

When talking to the customer

This requires training and role playing with your sales team. They need to think like the auto industry where everything is discussed in terms of monthly payments because some customers can’t pay up front.

In a typical sales conversation, you want to stay away from total price and concentrate on monthly price. Here’s an example: Sitting at the kitchen table.  “Mr./Mrs. customer, when I first arrived and we were discussing  needs for your home,  I asked you what your monthly budget would be, and you wished to keep it under $200 a month. We have been discussing three options, and they all will heat and cool your home (this is very abbreviated by the way).  The deluxe system would be $213 a month, which is just over your desired budget. The gold star system comes in at $235 and diamond at $267.” 

“However, I have something for you to consider that makes these options even more affordable.  We discussed electricity rates earlier and you mentioned that you pay about $300 a month for electricity.  As a rule of thumb, approximately 50% of that goes toward heating and cooling your home, or about $150 a month. 

Depending on the system you opt for, modern equipment offers significant advantages over repairing old equipment because of technological improvements, particularly in energy efficiency. You could realize savings of anywhere from 40% to 50%, which is at least $60 a month that you don’t pay to your utility company and can reinvest the savings into your home. That drops your monthly new out-of- pocket cost to $153 ($213 minus $60), which is well below your budget. In fact, the diamond is now only $207 (or less) when you reinvest your utility payment savings.”

For many, this is a culture change to view everything in terms of monthly payments. However, customers make decisions often based on financing availability and monthly payments. Do not be left behind. By suggesting a measured and reasonable approach to pay for any new unit, you can often remove the issue of overall cost from the sales process. 

David Dombrowski began his career not in the HVAC business but with the international transportation division of GE, controlling operations in seven states and South America. He was one of the first members of the consulting team with Ron Smith as he started Service America. He has worked for the past 32 years for the 1997 contractor of the year and is a  Master license holder for a large HVAC/plumbing company in Raleigh, NC.

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