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Explaining the economics of financing and how contractors still win

Abby Ricardo
April 17th, 2024
6 Min Read

Richard Fluornoy had one request to his office at A-Total Plumbing last fall: Please send an email reminder to customers that financing is available on potential jobs.

In one month, that single reminder generated $44,000 in revenue. That highlights the potential of offering financing to every customer, and the benefits of Integrated Financing in ServiceTitan, the cloud-based software for the trades.

“(Financing is) really the silver bullet in sales,” Flournoy said. “If you lead with it, it relieves stress.”

In today’s economic landscape, offering financing simply makes sense. It’s important that home services contractors lead with financing on every eligible job to help increasingly price-shy customers afford big-ticket jobs.

But there’s a second part of the equation that might make homeowners wary of accepting consumer financing, and that’s the changing macroeconomic landscape. You may have noticed some developments in the past year:

  • Lower approval rates for homeowners

  • Shorter-term loans

  • Higher APR

  • Higher merchant fees

Sound familiar? The cost to acquire capital has gone up across the board for companies in every industry.

Let’s break the situation down to what is happening, what to expect, and better yet, what can be done about it. 

Why interest rates have risen

There are dozens of factors that have contributed to the current economic moment, but a major factor for the cost of capital is the Effective Federal Funds Rate (EFFR).

During the height of the COVID-19 pandemic, the EFFR was lowered precipitously, reaching .05% in April 2020 to encourage spending and boost the economy. Since 2022, the EFFR has rebounded, returning to 5.33% as of July 31, 2023.

That’s a drastic increase in the cost of raising money for banks, and there are no signals that the Fed will return to the below 1% interest rates of 2022.

Changes to the EFFR have an immediate cascading effect on all other interest rates. The cost to borrow capital rises for banks, so they pass on some of those costs to their corporate and consumer customers to pay the credit spread.

Historically, most lenders would charge an interest rate of 1-2% higher than the risk-free rate depending on the creditworthiness of the applicant, but economic uncertainty has also affected the spread, which means the interest rate ultimately offered to homeowners goes up even more.

How higher rates affect the trades

When banks and lenders have to pay more to raise money, the effect cascades to manufacturers, suppliers and the trades. Costs increase down the line and are passed on to the customer.

There are four primary levers lenders can pull to try to offset rising costs:

  • Interest rate (APR)

  • Merchant fees

  • Approval rates

  • Term length

As interest rates and term lengths increase and decrease respectively, the attractiveness of financing a new HVAC or septic system may decrease for homeowners. Meanwhile, increased merchant fees may make certain financing plans less attractive because the contractor is responsible for those costs, which eat into margins. Even with the perfect plan, lowered approval rates make offering financing more challenging.

What contractors can do

None of this means trade businesses should stop offering financing. In fact, the opposite is true; the data actually emphasizes the importance of financing. In a time when money is tight, a customer may be more willing to spend $80 or $60 or $30 per month than $3,000 at once.

Financing gives customers the purchasing power to pick the replacement or service they want, not just the one they can afford at the moment.

“It opens the door for the customer to afford all your products, and they may buy something that they otherwise wouldn’t have if you hadn’t presented financing options," said Darius Lyvers, Chief Operating Officer at F.H. Furr Plumbing, Heating, Air Conditioning and Electrical. “That’s the part that a lot of people miss.”

To protect margins, it’s important that businesses adopt a strategic approach to which financing plans they offer.

Play with your Plan Mix

The 60-month loan at 0% APR may look appealing on paper, because who doesn’t prefer 0% interest? But it comes at a cost for contractors because merchant fees can soar 25+% compared to other terms, and approval rates will be rough for such stellar terms. 

To keep merchant fees in check, consider higher APR or shorter-term loans that will balance the cost between the contractor and the customer.

ServiceTitan recommends the following:

Step 1: Tier customers by behaviors seen most often. It may differ depending on location. Two types of buyers are in the market. “Cash buyers” are homeowners who are cash-strapped on the day of sale but want to pay things off quickly and with as little interest as possible. “Payment buyers” are comfortable taking on a long-term payment at slightly higher interest rates as long as it fits into their monthly budget.

Step 2: Calculate what merchant fees you are prepared to pay to protect your margins. Discard any plans that come in above that number. Some contractors are willing to absorb a higher merchant fee on the occasional deal to provide exceptional customer service to a high-value customer, so consider those outlier scenarios as well.

Step 3: Identify a few plans that fit into the customer buckets you defined in Step 1. For example, a “cash buyer” would be more amenable to a 12- or even six-month loan type with low APR, while a “payment buyer” would be more comfortable with a fixed rate loan spread over a longer time period—think 9.99% over 120 months.

Step 4: Re-evaluate the plan mix every month. Terms change as macroeconomic conditions shift, so contractors should react to those changes as well.

Lean on ServiceTitan solutions

Choosing the right financing plan mix is one thing, but actually ensuring that technicians offer the right plans in the field is a different challenge altogether.

ServiceTitan’s Integrated Financing helps by offering custom settings (Settings > Financing > Loan options). Custom rules can be set for different business units (different financing rules for plumbing compared to HVAC, for example) and allows businesses to set custom rules for rates and tiers based on cost of the job, which ensures profits remain where they should be for each job.

This feature eliminates the need for a technician to assess whether a customer can qualify. These features allow businesses to pre-select the plans and terms technicians can show in ServiceTitan Mobile, so when they present an estimate to the customer, the right monthly payment appears.

“Since implementing ServiceTitan’s Integrated Financing, our close rates have improved by 20%,” says Alisha Wilson of Eagle Pipe & Mechanical LLC. “Having everything integrated gives customers the ability to shop without embarrassment if the project pricing isn’t where they’re expecting it to be.”

Getting started with Integrated Financing is simple and costs nothing as a ServiceTitan customer. To get started, meet with the FinTech team to enable the integration. The Utilization team also is ready and waiting to help set up rules and train techs on how to present in the field.

Get started with Integrated Financing today.

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