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Here’s Why Most Customer Financing Solutions Are Fool's Gold

Since our inception, we have worked with many thousands of businesses helping their customers, clients and patients finance the sale of their goods and services. While our core solution has been our ever evolving direct-to-consumer multi-lender platform, we have set up many businesses with lenders that fund the business directly, also known as direct-to-merchant lenders.

And here’s what I can say with utmost certainty, for our clients that are set up with a direct-to-merchant lender, it’s not if, but when, they will be cancelled.

Countless times, we built a robust portfolio with a lender or small platform of lenders that provide direct-to-merchant customer financing only to see that portfolio disappear, virtually overnight, and our clients scramble for a new answer.
It’s important to understand that direct-to-merchant financing does come with an inherent risk to the lender. There’s a direct correlation between the performance of the loan and the perceived value of the product or service, as well as the business tied to it. If a product or service fails to meet expectations, or if the business ceases to exist, the default rate will jump. Individuals don’t always grasp the role that financing plays in their transaction. Consumers often assume that the loan payments are tied to the business when in fact, the business’s funds were settled and the loan, just like any other, is between the borrower and the lender.

While lenders that provide loans directly to the consumer primarily focus on the individual’s probability of successfully paying back the loan, lenders in the direct-to-merchant space have a far more complex risk assessment.

  • The lender’s comfort with the product(s) and/or service(s) they choose to finance.
  • The strength of the business that provides the product or service including an evaluation of time in business, how and where they sell, revenue, website, on-line and off-line reputation of the business, and the character, and sometimes credit profile, of the business owner(s).
  • The return and cancellation policy that the business adheres to.
  • The geographic location of the business and consumers.
  • The credit worthiness of the applicant.
Lenders that lend directly to the consumer primarily mitigate the risk through the APR they ultimately charge the borrower, lenders that fund the merchant directly will charge the business a Merchant Discount (in addition to the borrower APR). The Merchant Discount Rate (MDR) is the percentage of the loan that will be withheld from the merchant and reflects the risk.
Lending is a business just like any other, so the decisions they make represent their appetite for risk as it relates to profits.  High risk loans typically mean higher potential profits and of course, higher potential losses.   
The challenge for businesses working with direct-to-merchant lenders is that the loans attributed to them are under constant scrutiny as well as the performance of the loans in their designated industry.  In other words, a dental practice could get caught up in a lender’s decision to no longer service that industry even if that practice’s loans are performing well. And the axe can come down on the relationship suddenly and without warning. It could be one loan application deemed as fraudulent. It could be a sudden uptick in first payment defaults. Or it simply could be that the metrics for that industry are pointing towards problems in the future.
 I’ve experienced many businesses that have designed their sales strategy around a particular lender only to have the rug pulled out from under them, overnight. I’ve also seen entire industry portfolios get cancelled by a lender because that industry is suddenly deemed too risky.
Lenders are certainly entitled to make business decisions that impact their bottom line, but these decisions come with a steep price.
We are experiencing a time when providing consumers with financing options is more important than ever for your business. Many consumers have lost their liquidity. Others just lack confidence in their financial future and are unwilling to liquidate (see article).
So, what can your business do to counter the risk associated with being left without an appropriate lender for your customers?

Hedge your bets, create redundancy.

Simply, don’t settle on one lender. It’s important to have at least two lenders that will cover each credit category that your customers may represent. Sometimes, this is easier said than done. Choices may be limited, and lenders are selective. Also, lenders may have volume considerations and spreading your customers around can dilute your leverage.
One solution can be to utilize a multi-lender platform. Platforms take on the burden of meeting volume requirements and some can give you the proper coverage. Keep in mind that they have the same concerns and challenges that you do. They have a portfolio of clients to accommodate.

Utilize a direct-to-consumer multi-lender platform.

I’ll get on my soapbox and state that this is an alternative you probably shouldn’t ignore. Now, I can only speak for our platform, but we have built in redundancy. We have lenders that come and go, but with over 30 represented on our platform, our clients hardly miss a beat. They will not get cancelled by a particular lender based on loan performance.
Admittedly, direct-to-consumer financing has certain drawbacks though we are closing the gap for our clients. That said, there are several benefits.
  • Decisions within seconds.
  • Lenders that will accommodate large dollar amounts for qualified borrowers.
  • A broad range of lenders that will lend across the credit spectrum.
  • The application has no impact on the consumer’s credit score- soft credit pull only.
  • Relatively low costs to the business.
It’s very important to always keep yourself informed on market conditions related to your industry and the lenders you utilize.
While lender decisions are usually abrupt, they often don’t occur in a vacuum. Often, there will be rumblings. Keep your finger on the pulse of your business. If application results begin to deteriorate, it’s typically a calculated move by the lender. Take notice and begin to quickly plan your pivot because a change is likely in the works. Do not get caught flat footed. When it comes to financing options for your customers, more is better than less. Always keep your options open.