How to Choose a Third-Party Lender

Updated on March 10th, 2022
How to Choose a Third-Party Lender

Consumer finance companies are not commodities. They are not all alike. Yes, price and interest rates are important. But these companies can vary widely in ways that are vitally important for you and your company.

The best finance company to partner with meets these criteria: 

  1. They are committed to your industry and niche. 
  2. They offer financing and terms structured to suit your ticket size. 
  3. They make it easy to apply. 
  4. They will approve your customers.  
  5. They can make quick credit decisions. 
  6. They will do manual underwriting for customers who may not meet traditional bank credit criteria.
  7. They can make quick credit decisions. 
  8. They treat your customers fairly.
  9. They communicate well. 
  10. They release funds instantly.

Let’s take a brief look at each of these factors in turn:

1. Find a partner that commits to your industry or niche. 

Industry specialists are better partners than generalists. For most merchants and contractors, the best consumer finance company to partner with is one that has a concentration and commitment to your industry, specifically. In the long run, vendors tend to have a better experience with finance companies that are committed to remaining in their industry rather than one that just does general financing. 

Furthermore, finance companies that concentrate on your specific industry or niche have a vested interest in your success, and the success of others like you. If they get a significant fraction of their business from financing water filtration systems, for example, they will work hard to maintain their reputation among water filtration system distributors.

For a generalist, it’s too easy to walk away from any specific customer, niche, or distributor. But when a finance company has made a commitment to your niche, they know that dealers and salespeople in your niche talk to each other. You see each other at trade shows and luncheons. If your finance company is committed to your industry, you can be much more confident that they will work with you to resolve any of the inevitable little problems that come up.

2. Partner with a company that offers programs tailored to your niche.

Here’s where industry specialists have an advantage over generalist finance companies: Industry-specific customer financing companies can and do tailor their financing options to suit your business. If your typical install is $8,000, it does you no good to use a financing company that won’t approve more than $3,000.

You want one that understands that your typical $8,000 price is typical, reasonable, and fair for your industry. You also want a finance company that won’t flag an $8,000 loan application for extra scrutiny, or makes good customers jump through a lot of needless extra hoops to get approved. They’ll get the information they need to underwrite the deal upfront on the application. And they expect to finance $8,000, $10,000, or even more.

In fact, the right financing partner for you should welcome your larger deals. Not make things more difficult for you. 

3. Find a lender that makes it easy to apply. 

Paper applications are out. Today’s customers want and expect nearly instant credit decisions. They are accustomed to filling out web applications and accustomed to getting a credit decision in seconds. 

The best consumer finance company for you is one that makes it easy for your salespeople to get a credit application filled out on the spot, right on the sales appointment.

 4. Choose a partner that makes quick credit decisions. 

Delays give the customer a chance to put it off until tomorrow. Or shop the deal around. Or just plain change their minds. In any case, any delay or complication in the credit application process risks costing you a sale.

Look for a consumer financing company that will take applications over the Web, right at the sales appointment.

If the customer is an edge case, or doesn’t quite meet the credit score standards, look for a company that will give the application a second look. One that will put a human underwriter on the case, apply some common sense, and possibly approve the loan. Or maybe approve a smaller amount or apply a special interest rate. Any of these is better for your customer and your firms’ reputation than outright rejection.

No finance company can or should approve everybody. But in general, the best finance company for you is one that looks for a way to say “yes” to your applications. 

5. Partner with a company that will approve your customers. 

Bank lenders are notorious for accepting only the best credit profiles. They have stockholders and regulators that restrict them from taking on anything less than very good credit. 

In the real world, though, you need to be able to do business with all credit types. Many good people have suffered some credit dings in the last few years – especially with the pandemic. 

Rejections hurt. They hurt your brand, and customers who are rejected are less likely to contact you again to do business later. They remember the pain of rejection, and when the time comes, they look for another vendor – one who can find a way to approve them. 

The best consumer finance company for you has programs and a path to approval for all your potential customers – even ones with fair or marginal credit histories.

They may get charged a higher interest rate. Or may not get approved for higher loan amounts. But the best consumer finance company for you will take a serious look at all credit types. 

6. Find a lender that does manual underwriting for customers who don't meet traditional bank credit criteria.

Today, most finance companies automate the credit approval process. Good credit flies through the system and gets fast approval.
Any finance company can look good with “A” paper.

But lots of your customers will be “B”, “C” or even “D” paper.

These can be great prospects and great customers. But they’ve suffered some temporary setbacks that have affected their credit score on paper.

Manual underwriting is the process of getting a human set of eyes to look at the application that doesn’t quite meet the initial criteria. A human underwriter can assess factors that don’t quite show up on a FICO score. Often, that human underwriter can find a way to say “yes.”

A good consumer finance company can get a human underwriter to look at the application and make a decision. Furthermore, if you’re taking the app during business hours, they can do it in minutes, rather than days.

If they can’t approve the loan then, the manual underwriter can give your salesperson and prospect some feedback and guidance about how the deal can get approved in the future.
For example, the customer may need to put down more upfront, pay off some delinquencies, or lower their current debt to income ratio.

If the customer can make that happen, a good finance company should welcome a reapplication in the near future.

Again, the right consumer finance partner for your company is the one that looks for a way to say ‘yes.’

7. Look for a lender that treats your customers fairly.

Furthermore, remember that rightly or wrongly, your customers will associate their experience with the lender with you and your company. Going with the wrong finance company can damage your reputation. 

Instead, you want to partner with customer financing businesses that help make your offerings affordable, offer a choice of terms that fit your customers’ needs, and charge your customers an interest rate that is reasonable and fair.

Collections practices should be reasonable even if the customer falls behind on the payments. The finance company must follow all applicable credit collections laws. They should not harass or threaten customers. They should have a trained and professional collections staff. Otherwise, their bad practices will come back to affect your reputation as a merchant. 

8. Partner with a consumer financing company that communicates well. 

Companies that offer financing need to communicate on two fronts: with you and your consumers. If they can't communicate progress, fees, and possible issues to both sides, you may need a better finance partner. 

9. Choose a company that releases funds instantly. 

A good third-party finance company knows that cash flow is the lifeblood of your business. They also know that as soon as you take on a new customer, you have fulfillment costs. You may have to buy materials, pay deposits, pay workers, installers, or subcontractors upfront, make truck and vehicle payments to get your workers and materials where they need to go.

In the past, sellers had to wait days or even weeks to get their funding from a finance company. Today, the standard is in minutes.

As soon as the customer confirms the purchase of your goods or services, your finance company should release the funds to you right away. No need to wait to get the capital in your account, so you can put it to work.

If you’re not getting all the above from your current finance partner, fill out this online form, and partner with us. 

Sara Hafeman

With years of experience in the consumer financing industry, Sara Hafeman currently leads marketing and partner development at Time Investment.