Friday, December 7, 2007

Career Colleges often find it difficult geting financing for Sub Prime Students

Career Colleges and their enrollment rates have grown rapidly over the years and so has the need for creative student financing programs. Most schools face the same problem when it comes to financing students; that is, a good number of students have zero or very little credit or poor credit at the time they are applying for financing for a student loan. Banks, Financing, and other Lending institutions will not lend money to students with these kind of credit histories. So what other options do schools have to get these students financed?

Many schools have government programs that enable sub prime students to get the financing they need. Schools that don't have these government programs usually turn to in-house financing by where they place the student on a retail installment contract or promissory note to pay for the tuition in monthly payments. The school then tries to collect the payment from the student each month. These kinds programs are rarely successful because School Operators and Managers usually do not have any kind of receivables management experience making it hard to create the cash flow needed from the receivables.

Here are some tips for Schools that are using or plan to use an in-house financing program.
1. Make sure you are using the proper financing documents
This is VERY important. It amazes me to see schools with hundreds of thousands of dollars worth of loans on the books written on poor promissory notes or contracts. Make sure you use a solid retail installment contract, as well as a good credit application. The more information on the credit application the better.

2. Meet with an attorney
You need to know the laws in your state regarding lending including usury laws and collection laws. Meet with an attorney who specializes in finance and receivables. They can also advice you on what type of retail installment contract to use.

3. Hire a receivables management company to manage the portfolio.
Receivables management companies can service the portfolio and collect the payments for you for a nominal fee. And they will collect much better then you can. A school trying to collect receivables is like asking your banker to teach you massage therapy or nursing.

4. Strive for higher graduation rates.
Students who graduate are MUCH more likely to repay a student loan than students who don't.

5. Place student payments on EFT or Auto Debit.
This will draft the monthly payment directly out of the students checking account and Will result in much higher collection rates.

6. Make sure payments are affordable.
Try to keep the monthly payment between $100, and $200 per month.

7. Get a Down Payment
Aim for at least 10% of the tuition price. Students who are serious about their education who find a way to come up with the 10%.

Implementing these tips will defiantly increase the productivity or you student receivables portfolio.

Tuesday, October 9, 2007

A Look at How Some Industries Generate Lots of Excess Revenue Through Sub-Prime Consumer Loan Programs

Good Receivables Management and receivables management practices can generate excess cash flow for businesses.
Many businesses selling goods or services that retail for $300 or more experience the same problem; trying to get financing for customers with less than perfect credit. It is heartbreaking when someone is eager to purchase your product, only to find out they have no way of paying for it. When that customer walks out the door, potential revenue follows them.

Finding solutions to this problem can be difficult. Sub prime consumer loan programs aren't easy to find. Most banks typically steer clear of sub prime unsecured lending. Many businesses often resort to financing these customers in house which is time consuming and expensive to manage and doesn't deliver immediate cash like typical consumer finance programs or credit cards do. So what other options do businesses have?

Installment contract funding is an answer that many industries have successfully turned to for years. In these programs, businesses sell their newly generated receivables to finance companies for immediate cash on a weekly, bi weekly, or monthly basis depending on volume. The program works much like any A credit financing program would. The customer fills out a credit application. If they are denied by the businesses first look option, they are then sent to the second look option for approval. The second look program is designed to accept a good number of those consumers who the A credit lender deemed "unworthy". The second look option will underwrite the loan and if it passes predetermined criteria, the lender will purchase the loan from the business, giving the business immediate cash for the receivable and then collecting the debt from the consumer just like the A credit lender does.

Because the second look option accepts a lesser credit class of consumers, it can not fund the business 100% of the principle balance like the A Lender. The default rate on the portfolio will be much higher for the second look option as well as the overhead. It is much more expensive to collect from sub prime debtors as it is from good credit debtors. To offset the higher default rate and overhead, lenders will charge the business a discount fee. It works much like the fee credit card companies charge and it is usually determined by the expected default rate on the portfolio. The more approvals you want (meaning the deeper the finance company will approve credit) the more it will cost because the default rates will raise as you move lower into FICO scores. The discount fee also enables the lender to charge a more competitive interest rate so that your customers will be happy. Discounts can vary greatly from as low as 5% to as high as 50% or more.

A typical loan purchase might look like this:
- Product/Service sells for $2,000
- Business receives a down payment of $500
- Finances $1500 to consumer
- Second Look option approves loan for purchase at a 15% discount ($1275 is funded)
- Lender funds business $1275 - Customer put $500 down - giving the business $1775 in cash for the $2000 product/ service.

From this example you can see that the business was able to make the sale and generated $1775 in cash from the transaction as opposed to the customer walking out the door and the business receiving $0.

Because discounts make these programs work, they are best used in industries that have high product margins so that they can comfortably absorb the discount and still make a sizable profit. Generally you need a markup of 40% or more from what the product or service actually costs you to deliver. Service based industries are perfect matches for these programs. Here is a list of industries where this type of financing and receivables management works well:

- Trade / Vocational Schools
- Seminars
- Travel / Vacation Clubs
- Funeral Services
- Timeshares
- Campgrounds
- Computer Sales
- Consulting Services
- Fitness / Health Programs
- Medical Procedures
- Cosmetic Surgery
- Hair Transplantation
- Infomercial Sales
- College Prep
- Lasik
- Pool/Spa

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Wednesday, September 26, 2007

Generating More Revenue Through Sub Prime Consumer Finance Programs

If you own or run a business that has a product or service that sells for $300 or more, chances are that you have searched for second-look financing or other ways to provide your customers a method of payment to purchase your product or service should they not have the cash, room on their credit card, or are denied by your primary financing option. Nothing is more frustrating then when a customer is ready to buy your product and gets denied for financing. It is like revenue flying out the window.

The best way to solve this problem is with the use of installment contract funding or sub prime programs programs. Generally these terms can be simply defined as financing for customers that have credit scores in the low 600's and below. Every first look lender has different criteria for approval and it can vary greatly depending upon the product or service being sold.

Second-look consumer financing or installment contract funding programs that work for your business can be tough to find. You can't just apply for them at your local bank and most primary consumer lending institutions do not do business in the subprime world. In addition to being tough to find, each company can vary greatly when it comes to how they structure their programs and what industries they do business in.

Here are some tips to help you find sub prime lenders:
1. Search for "debt buying companies" as opposed to "finance companies". Many of today's debt buyers have consumer financing programs and are used to dealing with subprime debtors.

2. Talk to other businesses in your industry. One of your "friendly" competitors may already have a successful program in place.

3. Contact billing or servicing companies. Many billing or servicing agencies collect paper for debt buyers or other finance companies that deal in second look finance. They might refer you.

4. Ask your first look lender for a recommendation on what to do with turn downs. They may partner with sub prime companies on other deals they are doing and these companies might work with your deal.

5. Work with a receivables management consulting firm like East Bridge Funding who can build a customized program working with their network of second look financing lenders. Generally these firms earn fees from lenders so the work they do for you costs you nothing and you get much better results in a much shorter time frame.

6. Check with your local banker in charge of commercial accounts. Commercial bankers get asked all of the time by their customers about consumer finance programs which they typically don't do. He or she may have a referral for you.

In the near future I will discuss some of the important factors involved in working with a lender, once you have found one, to get the best program that is right for your business and your customers.

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