By providing consumer finance through contractors, we offer services to both the consumer purchasing a home improvement and a contractor selling and installing that home improvement. We take this three-party relationship seriously and feel we have obligations to both contractors and consumers. Sometimes the obligation requires a balancing act. Finding the middle ground between what is great for a contractor and what is great for a consumer is not always easy. So, with that as the background, let’s talk about staged funding.
Staged funding is a process wherein a builder is provided funds from a loan as stages of a project are completed. It comes from the residential new construction world. When building a house, there are several clear stages involved and a contractor uses significant funds to finish each. As each stage is completed, the contractor requests a disbursement from the consumer’s construction loan and provides evidence of the expense to justify it. At the bank, interest begins to accrue on the amount disbursed, meaning the consumer’s loan is accruing interest before the job is complete. In short, the consumer pays for the contractor’s expenses on the job, but only when value is delivered.
A Quick Thought Experiment
Imagine you are buying an economy 4-door sedan from a major auto dealer. You reach the end of the purchasing process and the auto dealer tells you that a 50% down payment is required. But here’s the kicker: you’ll wait 4-6 weeks for the car to be shipped before delivery. Will you still buy that car? In general, I expect the answer is “no”. Why? Because there is nothing custom about an economy sedan and it isn’t customary to pay 4-6 weeks before you receive value for your purchase.
Compare this to the residential new construction scenario. Everything about that purchase is custom, the process is long and expensive, and value is being provided throughout. For example, the site might be excavated, then the foundation poured, the framing done, the shell finished, then the interior work done. Different subcontractors are often used in many of these stages. It makes sense to compensate the contractor for the significant outlay in time and money. Plus, you can see the progress being made.
Applicability to Home Improvement Lending
Staged funding flowed downstream to the remodeling industry and found its way into our little niche. First, it was used for only big-ticket purchases like sun rooms, kitchen remodels, or pool installations. Frankly, those projects really aren’t in the same category as residential new construction projects. There is a major difference in time and money between a $200,000 residential new construction project and a $20,000 kitchen remodel. However, it became the norm for these projects to be funded in stages many years ago, so there’s little point in tilting at windmills.
Lately, however, a couple competitors have decided that staged funding is a nice service for any type of project. As we grow as an organization, we are increasingly having conversations with window contractors (for example) selling $8,000 jobs with a turn-around time of 45 days that absolutely, positively REQUIRE staged funding to do business.
We have a simple answer for them: no you don’t.
Now, I promise you that answer isn’t flippant. Stay tuned and we’ll show you why staged funding is NOT a requirement to do business, particularly when you’re selling a small job size.