Second-Look Financing: How Does It Benefit Your Home Improvement Business?

This blog was originally published on May 15, 2024. We updated the content to provide you with the most current information.

If the phone’s been ringing a little less this year, you’re not alone. At a recent Morgan Stanley Laguna Conference, ACHR News reports that HVAC industry leaders from Carrier, Trane, Lennox, and Watsco painted a sobering picture: high interest rates, cautious consumers, and excess inventory have created one of the toughest residential markets in years. The ripple effects are showing up everywhere. The New York Fed shares that the number of “discouraged borrowers”—those who need credit but don’t apply because they expect to be denied—has climbed to a record 8.5%. That’s the highest level since 2013, when they began their Survey of Consumer Expectations.

Whether homeowners decide not to apply or get denied, the result is the same: you lose the sale. That’s where second-look financing can make a real difference.

What Is Second-Look Financing?

Second-look financing is a great financing option for borrowers with no, little, or poor credit history. These borrowers may not be approved for a traditional loan, even though they have the resources to make payments. Second-look lenders go beyond the credit score and look at the borrower’s entire credit profile and other factors, such as bank activity, during the underwriting process. This more thorough review allows second-look lenders to say yes to more borrowers.

Typically, this process is used after borrowers receive a denial through a traditional underwriting process. Their application is either passed to the next lender through waterfall lending, or the borrower has to apply for a new loan. This is why it’s called “second-look” financing, but you may also hear it referred to as near-prime or subprime lending.

Near-prime or subprime lending can be a more accurate description because a rejected loan application isn’t always required to receive a more forgiving underwriting process. Instead, borrowers who know a prime lender won’t approve them can apply directly with a near-prime lender or a subprime lender and avoid that initial rejection.

Benefits of a Second-Look Financing Partner

Second-look financing benefits both borrowers and contractors. Borrowers get an opportunity they may not have otherwise — and at competitive rates often lower than credit cards or payday loans.

But there are even more benefits for contractors. These include:

• Closing More Jobs: If your customer isn’t approved for a loan, it’s not guaranteed they’ll continue with the project. They may find a different contractor, decide to DIY the project, or put it on the back burner. The opportunity for a second look can help save the sale.
• Not Taking on the Risk Yourself: It can be tempting to offer a payment plan to customers whose loan applications are denied to save the sale. However, you’re on the hook if the customer doesn’t pay. Offering a second-look financing application instead gives your customer another opportunity for approval, can save the sale, and keeps you from taking on the risk.
• Improving Customer Experience: Customers never want to hear “No.” Receiving a denied loan application can sour their experience with you, even though it’s not your fault. A second-look financing option can help save that customer experience, especially with a waterfall lender. Waterfall lending uses one application that will be sent to a second-look lender, if needed, without any extra work on the customer’s end.

Taking advantage of the benefits of second-look financing can help improve your customer experience, close more sales, and boost your profit margins. However, the end result also depends on choosing the right partner.

Choosing a Second-Look Financing Partner

As with any business decision, choosing a second-look financing partner shouldn’t be taken lightly. Here are a few things to keep in mind when making this important decision:

• Fees: Risk-based programs like second-look financing often have fees, but not all do. For example, at FTL Finance, we have standard programs without fees and other programs with fees contractors can opt into.
• Approval Time: Your customers applying for a second time don’t want to wait long for a decision. A thorough credit profile review can take longer than a typical approval. But at FTL Finance, we’ll provide a decision within 15 minutes for applications submitted during business hours.
• Waterfall Lending: Second-look lenders participating in a lending waterfall give you an extra layer of security when customers submit an application. You don’t want them to get another denial, and putting their application in front of multiple lenders gives them the best approval odds. FTL Finance’s lending waterfall approves about 80% of applicants.

Choosing the right financing partner is crucial to providing the best experience for your customers. Learn More about FTL and if we’re the right fit for you.