As savvy home improvement contractors know, offering financing options to your customers can be a game-changer for driving sales and improving customer satisfaction. However, understanding the true cost of these financing options—known as your blended finance cost—is critical to maintaining profitability.
By factoring in loan fees and credit card fees into your pricing, you can increase sales without sacrificing profit margin. But how do you get a good number to plug into your business plan? Let’s break it down step-by-step.
Understanding the Financing Mix
Typically, customers pay for home improvement projects through a mix of personal loans, credit cards, or checks (though sometimes a roll of cash does show up...) For our example, let’s assume 50% of your customers opt for personal loans through a platform like 1LOOK, while the other 50% pay with credit cards or checks. Of those not taking loans, we’ll estimate 40% use credit cards (with a 3% fee) and 10% pay by check (no fee). Your numbers will likely vary, but if you follow this methodology, you'll get to a solid blended finance cost estimate unique to your business.
Step 1: Calculate Loan Fees
Loan fees vary depending on the loan type and the customer’s credit profile. Let’s assume 80% of loans come with fees of 3% (a typical term loan), while 20% carry a higher fee of about 10% (a promotional loan - like 12 months of no interest or payments). If 50% of your total sales are financed through loans, you can break this down further:
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Low-fee loans (80% of loans): This represents 40% of your total sales, since 50% of your sales are through loans, and 80% of those loans are at 3%. So, for these loans, you would calculate 3% (fee) × 50% (percentage of sales that are financed) x 80% (percentage of financed sales in the low-fee bucket). Putting that together, we get 3% x 50% x 80% = 1.2% of total sales.
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High-fee loans (20% of loans): Using the same method, we get 10% (fee) x 50% (percentage of financed sales) x 20% (percentage of financed sales it he high-cost bucket), or 10% x 50% x 20% = 1%.
Adding these two together, the total loan fee contribution to your blended finance cost is 1.2% + 1% = 2.2% of total sales.
Step 2: Factor in Credit Card Fees
Now, let’s tackle the 40% of customers paying by credit card, each incurring a 3% fee. This applies to 40% of your total sales, so the base cost is 3% × 40% = 1.2% of total sales. However, this cost depends on your policy:
- If you pass the fee to customers: The credit card fee doesn’t hit your books, so it contributes 0% to your blended finance cost.
- If you absorb the fee: You pay the full 1.2% of total sales.
The remaining 10% of customers paying by check incur no fees, so their contribution is 0%.
Step 3: Compute the Blended Finance Cost
Your blended finance cost is the weighted average of all these fees across your sales. Let’s look at two scenarios:
- Scenario 1: You absorb credit card fees
Loan fees: 2.2%
Credit card fees: 1.2%
Check fees: 0%
Total blended finance cost = 2.2% + 1.2% + 0% = 3.4% of total sales. - Scenario 2: You pass on credit card fees
Loan fees: 2.2%
Credit card fees: 0% (passed to customers)
Check fees: 0%
Total blended finance cost = 2.2% + 0% + 0% = 2.2% of total sales.
Our Calculator
If you want some assistance with this calculation, we've built a calculator for you! Check it out here: https://bit.ly/3FIZqnP
Why It Matters
A blended finance cost of 2.2% to 3.4% aligns with industry best practices (4-5% is often a target ceiling). By calculating this figure, you easily price your finance costs into your base product pricing. Understanding your blended finance cost empowers you to balance customer convenience with profitability—a win-win for your business.
Post by Rob Macklin
Mar 27, 2025 10:01:27 AM
Mar 27, 2025 10:01:27 AM
