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Financing has become more and more common. Considering the current state of the U.S. economy, it makes sense. Prices have risen exponentially all across the board, and as a result, consumers don’t have or spend as much money as they once did. So financing options, because of their ability to give the consumer more time to pay, started to pop up more and more in a variety of places. One of those places was the HVACR industry.

Financing was once feared by HVACR contractors due to its associated costs, but nowadays it’s something that many embrace. It provides customers with a certain level of care that recognizes the high upfront cost of the (usually unplanned) purchase of an HVAC system. And though there may still be some costs to the HVAC contractor, not offering financing options often means losing business.

In order for HVAC contractors to start offering financing if they aren’t already, they have to take the time find the right lender/finance company, train their staff, and invest in understanding what it means for their customers and their company in order to make it profitable enough to outweigh any associated costs.

A Needed Option

HVAC geeks and electrification enthusiasts aside, most American consumers purchase a new air conditioning system because they need to, not because they want to. Sometimes that purchase may happen at a very inconvenient time — when times are tough or money’s tight.

“An unexpected purchase in today’s economic world, like an air conditioner — not a lot of people have $8,000 sitting in a savings account that they can just write a check for,” said Thomas Murphy, managing member and dealer concierges at IHCS Finance, LLC. “So financing is very important, especially for those with lower credit scores.”

“Financing has become more and more prevalent,” said Chad Cosby, director of enterprise lending sales at Ally Bank. “The type of financing being offered is changing to offering low monthly payments, as opposed to long term low interest. Really, that's for a couple reasons. No. 1 is to keep the cost down. And No. 2 is to give the consumer an affordable monthly payment that they can work with.”

Due in part to supply chain challenges, over the last two years there have been multiple double-digit equipment price increases from most major HVAC manufacturers.

“Not to mention rising costs of labor and new regulations placed on the [HVAC] industry, especially environmental regulation,” said Todd Grzybinski, president at FTL Finance. This has resulted in the average financed amount increasing 25%-35% depending on the region.

HVAC customers want that financing option. They may not know it yet, but if the option were to be presented to them, many would jump on it.

Curtis Howse, CEO of home & auto at Synchrony, said current consumer behavior suggests that offering financing is increasingly important for an HVAC contractor, especially given that consumers are prioritizing energy efficiency and seeking environmentally friendly solutions — and HVACR systems play an incredibly important role in energy consumption.

“Having the option to pay over time gives them the buying power to get what they need right away,” said Howse. “Offering financing can also give HVACR contractors a competitive advantage over those who don’t provide such solutions, both by appealing to budget-conscious consumers and allowing them to offer a wider range of products and services to meet more of the customer’s needs, such as air purification systems, warranties, and repairs.”

Ultimately, financing offers contractors not only an opportunity to grow their business and bring in more revenue, but also a new way to serve their customers.

Financing Costs

The cost of financing to an HVACR contractor varies depending on what financing structure they decide to use. Some have more fees associated with them than others, and some have none at all.

“However, contractors will likely incur costs if they offer promotional products,” said Grzybinski. “For instance, same-as-cash (SAC) loans allow the customer to avoid paying interest for a period of time, whether that is 6 months, 12 months, sometimes even as long as 24 months. As long as the consumer pays off loan within the SAC period, they won't owe interest. But finance companies will charge the contractor a fee in order to offer that product.”

“Really, though, accepting anything besides cash will incur fees for the contractor — if a contractor accepts credit cards as a payment method, for instance, they'll pay processing fees to the credit card processor,” he continued.

Over the last five years in the HVAC industry, there’s been a shift toward financing plans that don’t have any contractor fees associated and carry no costs at all. In fact, these days Cosby doesn’t run into many HVAC contractors who are worried about financing. Instead, they recognize financing is something they have to have in their arsenal.

“The worst case scenario, if they offer financing, is the customer doesn’t need it,” Cosby said. “And so the HVAC contractor gets another form of payment. But the worst case scenario, if they don't offer financing, is they have a customer that needs financing. There's not a downside to offer it as long as the general manager or owner is invested in it and ensures that everybody's on the same page.”

So when it comes to an HVACR contractor making the decision to offer financing and deciding whether or not it’s a fit for them, Murphy said, “Any HVAC dealer better have financing or their competition is going to eat their lunch, because we're in a payment world.”

Grzybinski said if a contractor is not interested in growing their business and is happy with their current annual sales volume, then they probably don't need to offer financing.

“However, they're probably losing multiple jobs by not offering it, as well as losing the ability to upsell additional products on the jobs they are retaining. When we consider the cost of equipment and the current economic conditions, I'm not sure how long a contractor can survive by not offering it.”

Understanding Financing

While an HVACR contractor can probably begin to offer financing options as soon as they register with a financing company, in order to make it profitable, they still have to take the time to understand it.

“Contractors should understand the financing company’s programs, the costs associated with them, whether there are minimum application requirements or approval requirements, and whether a recourse agreement is required,” Grzybinski said. (A recourse agreement would require a contractor to forfeit funds if consumer makes a claim.) “All of these factor into just how much a contractor will have to pay in order to offer financing.”

When looking for a lender, contractors should consider what type of lender fees they are comfortable with and what credit scores the lender will cover. Ideally, Murphy said, the lender will cover all FICO scores from 300-850. That type of lender ensures that HVAC contractors are taking care of every type of customer or potential customer.

“People live outside of their means and look like they're doing extremely well, but they're still living paycheck to paycheck,” Murphy said. “People buy payments.”

Profit of Financing

(Courtesy of Getty Images)

Giving customers freedom, training staff, and blending financing costs are crucial in order to make financing as profitable as possible.

“Contractors really have to invest in training their staff on financing,” Cosby said. “Make sure that everybody's bought in and make sure that financing is being offered on every job. That doesn't mean that it has to be used, but at least giving it as a payment option to the consumer. And then letting the consumer decide how they want to pay for their new HVAC unit … and then offering that consumer a low monthly payment.”

Grzybinski said the easiest way to make financing profitable is to build financing costs or fees into every job for every consumer, regardless of whether that consumer uses financing.

Murphy echoed that advice.

“Most of the time, HVAC financing will be 50% or less of the volume,” he said. “We tell [contractors] to build in some percentages into all your deals that can cover your lender fees on finance deals.”

While HVAC contractors can certainly build financing costs into jobs, it’s important to note that it’s illegal to charge for financing. For example, say an HVAC contractor quotes a customer $8,000 for an HVAC system and install, then finds out the customer wants to finance the purchase, which will cost the contractor extra. In this situation, the contractor can’t go back and re-quote the customer to account for those additional costs.

“So HVACR contractors should integrate financing into the sales process early on rather than as a last-minute offer,” Howse said.