Will Your Customers and You Use the Same Bankruptcy Attorney?
Consumer financing deals abound, and long have, with retailers that sell high-ticket items. Obviously, if they can get a customer to commit to a purchase today rather than save up at home for it at a later time, then that retailer gains a unit sale sooner and has less chance of losing it to a competitor in the mean time. Smart, right?
I don’t deny it on its face, but I do throw up a big caution: if you as a retailer don’t self-finance these deals and leave your own skin in the game as a natural check-and-balance, then choose your 3rd party financier very, very carefully.
You might be thinking that I am going to warn about unscrupulous lenders, but that is not my topic. Rather, I am going to warn about this little idea that ‘birds of a feather flock together’.
Young in my business ownership career, a pastor once told me that the world of retail is built on the poor decisions of consumers. His point was that much of our economy hinges on customers who spend more than they earn, relying on credit to have nice things now rather than follow Dr. Peck’s timeless advice about delayed gratification. Millions of customers are one unexpectedly missed paycheck away from late credit payments that, if not quickly made up, become charge-offs, lost assets and/or bankruptcy. It’s the American Way, isn’t it?
It’s sad, and some would say a shameful commentary on our materialism and greed, but this isn’t really a social commentary site. However, there is a warning to small business owners about not letting your business model be a reflection of the same values, or the same thing as happens to consumers with bad debt can happen to you.
The pivotal question: does your business depend on 3rd-party financing to make enough sales for your business, itself, to survive? If so, you’re in trouble (and you may not even know it).
3rd-party financing companies make a lot of money. This is because they take a lot of risk and will extend credit to those that traditional sources (like banks) won’t touch with a ten foot pole. How can they do this, especially with all the X-months same-as-cash and seamingly cheap deals? Because they have calculated that the type of customer who pursue this financing rather than use their own bank for a loan or their own credit cards is generally one who is bad with due dates and deadlines. As soon as they miss a payment to keep the sweet deal, there is no mercy and they get hit with massive fees, back-interest charges, and ongoing interest at usurious rates. A minority of these customers never pay and just let the deal sour their credit, but the financing company gets enough of them to fork it over that they make a lot of money. Kind of leaves you with an oily feeling doesn’t it?
So as a small retailer (because large ones don’t have souls, right?) ask yourself, is that kind of business partner a reflection of your values? Maybe so, maybe not, but if you like to think not, then consider this: how fondly is a customer likely to think of you or your product when the last thing they remember about it was the nasty experience they had with the aggressively rude financing company that bilked them for every late fee and dollar of high interest?
Then consider this: if you need poor creditworthy customers to maintain your own credit rating with your suppliers, and something happens with consumer protection laws or the larger economy that suddenly stops the profligate spending habits of a lot of your financed customers, are you the next domino to fall from falling sales?
In my experience owning multiple small businesses, we have never used 3rd party financing companies at all and offered financing only through reputable local banks. IMO, if a customer can’t qualify for credit via their own bank, credit card issuer, or my bank, I’m not helping the customer, I’m just selling stuff for my own gain. I care about customers more than that. And what’s worse than taking advantage of them, I am building my business model on shifting sand with little security.
So if I am truly both self-interested and smart, I don’t want to depend on these sales. If I cannot build a business to be strong enough without such sales, then I’m not building a very good business that offers value to customers worth paying for. It is far better for me if, by attracting and retaining the financially-smartest customers, I can weather economic storms because I know that other people who think like me and also weather these storms well will be able to afford continued returns to my store to shop with me.