EGIA
Cracking the Code Podcast
Author: Thomas Christian | Digital Marketing Coordinator at EGIA & OPTIMUS | October 3rd, 2024

How to Use Financing to Get More Business

Not every customer will be upfront with you about needing financing to afford your service. But even the ones who are may not tell you about their 15 outstanding credit cards balances, or that high-interest loan on a new swimming pool for the kids.

In this week’s episode of Cracking the Code, home services financing guru Matthew Bratsis explains the basic principles lenders use to approve or deny financing to customers, and what you need to look for to ensure you’re matching the right customer to the right lending option every single time.

Audio Transcription (in Beta)

This month, we are launching our financing 201 course. So we have a sample of that for you today. If you’ve already taken the financing 101 course, this is the next step in properly utilizing financing in your business. If you are a member, make sure to log in to watch the full course. And if you’re not a member, you can sign up for a 30 day trial to access the entire course, absolutely free. Now let’s dive into the content with Mr. Matthew Bratsis. Hey, this is Matthew with the EGIA Optimist, and we’re going to go into Finance 201 course. This is a little bit of a deeper dive into finance, where we’re going to really kind of understand some of the back end stuff, some of the more advanced metrics. Some of the stuff is just good for you to know. Some of the stuff there are going to be things for you to be able to do. So the first one we’re going to be talking with is understanding the underwriting and the approval process. Everybody wants more approvals, but do they even understand what banks or what lenders use to approve a loan? We’re going to get into that. And when you get into that, you always start with the three C’s of lending. And the three C’s are Character, collateral, and capacity. And each one of these plays an important role in the underwriting process and the approval of your customers. Now, many of these you have no control over, but you still need to be aware of the decisions that go in that are being made and how these go into those decision making. So let’s talk about the first one. Character. Character is about the customer. Character is what you do. What is the content of the character? How long have they been on their job? Are they paying their bills? Are they paying things on time? Do they have delinquency? Do they have medical debts? Do they have, well, one of the more famous ones is do they have student loan debts? Character goes to how stable is a customer? Right? And there’s a bunch of different factors. And the FICO score in the, in this case, when we talk about FICO score, really is driven based on character. So character, when an underwriter looks at character, they’re sitting there going, okay, they’ve been on the job for more than two years or have they jumped from job to job? How stable are they going to be? How again, it’s going to go towards a likelihood of repayment of the loan. Have they handled their debts? Have they gotten too many debts, right? It, they could be paying everything, but if they’ve gotten 15 open credit cards, it speaks to the character of the individual that they’re just going and getting money left and right. So there’s a lot of different character issues that are part of the that underwriting process. The second C is collateral. What does collateral mean? Well, this is pretty obvious. When you do a mortgage loan, the collateral is your home. If you default, the bank can foreclose and take your home on an auto loan. If you default, you can get the car repossessed. It is a security for the bank that they know if anything ever defaults, they have the ability to take something back. In home improvement lending, the collateral is an unsecured loan. So it, there is no collateral, unless we start talking about our subprime loans, which we’re going to get into in the next module. When we start talking about our subprime loans, there is collateral, because they will file a UCC1, which is a lien against the property that does not take precedence over the mortgage or any of the other liens, but does allow the lender to file so that if the house ever gets sold or transferred, they would be able to collect on that money. Right. So that would be collateral. So collateral is what are you putting up for the loan? Again, the banks, all they’re trying to do is eliminate as much risk as possible. So collateral helps them offset risk. However, in the home improvement industry, there’s not a lot of collateral they can use on a loan. And the third one is your capacity, right? What does capacity mean? How much money do you make? And do you have the ability to pay off the loan? Right. They always look for what you’re going to hear DTI, which is your debt to income ratio. They’re generally speaking, the banks are looking for a less than 50 percent debt to income ratio. So what does that mean? That means they take a look at what your household income is, and then turn around and say, Hey, 50 percent or less has to be lent out on payments. So if you’re making 10, 000 a month, which is nice living, if you’re making 10, 000 a month, they would like to see at least 5, 000 or less in debt moving towards that income that’s being taken up. So in other words. If you’re making 10, 000 a month, but you got a 3, 000 mortgage, you have a 500 car payment, you’ve got utilities of a couple hundred dollars, you’ve got credit cards that add up to a thousand dollars. They add all that up and as long as it’s less than 50%, you’re going to get an approval. So those are the really the three C’s that we’re talking about. We’re talking about character, collateral, and capacity. When underwriters take a look at the loan, they’re looking at all three of these aspects. And that is how we’ve driven the FICO score inside customers. Now, one of the common questions I get all the time is, which is the most important? Is it the character? Is it the collateral? Or is it the capacity? Well, let’s rule these out. They’re not equal, right? I know there’s the three C’s, but they’re not equal. Let’s, let’s be honest with you. The least important one is the collateral, especially in home improvement lending. There’s never been a car that has driven itself in to make a payment. There’s never been a house that’s decided, well, the owner’s not making payments, so I’ve got to make a payment. So collateral is not important. And especially in the home improvement lending, they don’t make a loan based on the collateral. So that’s not as important in this one. So then it comes down to his character or is it capacity? Many times people will sit there and say, it’s got to be character. It’s about how they pay their debts. It’s about how long they’ve been at their work. It’s as of all those figures, that is all incredibly important, but there is nothing, and I need to stress this too. There’s nothing more important than the capacity. You can have the best character. In the world, you can be at your job for 25 years, you could pay all of your bills on time if you don’t have the money to make the payment. If there’s not money to make a payment, you’re not going to make a payment. And you’re never going to prioritize a home improvement loan over your mortgage. Or your son’s medical debts or whatever else that’s gonna be coming up. So the single most important factor is capacity. So you need to understand, especially in the prime lending, and we’re gonna break this down on the next module, with the prime lender versus the subprime lender and the near prime lender. ’cause all of those are a little bit different, but most of your customers, it’s gonna come down to their ability to remake. How much money do they make versus how much are they putting out and spending out? That is the biggest difference. So if you get a customer that needs to be at 50 percent debt ratio, they need to make sure they have enough income. Now, most of these programs are going to be stated, so there’s a little bit more flexibility in that, but those are the three C’s that people look for underwriting when they make a decision. The algorithms set in the process do these things instantly, automatically, but those are the things that they are looking for. So just understand that when you’re talking to a customer, you have to look at the three things. What is their character? What is their capacity? And what is their collateral? And that’s what’s going to decide whether they get approved or not. Awesome content as always, and don’t forget to sign up for the free trial if you’re not a member. We’ll see you next week, folks. Until then, bye bye for now.

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