You’ve seen the car commercials.
“0% interest on all new models!”
There are hundreds of them. The format of the commercial… the financing offer… the urgency in the message… it has all remained unchanged for years. Why is that?
It’s because it works.
Offering below market financing is a powerful sales tool that helps you give customers what they want (an easy way to cashflow a purchase) while maintaining your product's value and reducing the amount you discount your offering.
It also significantly increases sales velocity. The customer doesn’t need to shop around for a better rate since the rate being offered is obviously below market. The decision is only: does this monthly payment fit my budget?
But here’s the thing: money always has a cost. No bank or lender lends money for free. So how could such a great rate be possible? Why is my company not offering this rate?
The answer is what we call a blind discount. Blind discounts are how vendors subsidize the cost of capital in a financed sale.
It’s called “blind” because the customer doesn’t know it’s there. It actually doesn’t affect the customer at all. When a customer buys with 0% financing they are literally buying with 0% financing. There is no catch.
A blind discount is defined as “the difference between the listed sale price for a piece of equipment and the amount funded to the vendor after finance charges”. In simpler terms, a customer is buying the equipment from the manufacturer for a list price, and a finance company is paying the manufacturer a discounted lump payment that accounts for the cost of money.
You, as the vendor, cover the cost of money for your customer.
Let’s say you’re selling a piece of equipment for $120,000. The customer asks, “what can you do for me on price?” Rather than just going ahead and dropping to $96,000 (a 20% discount), you can offer financing.
As you understand from your earlier discovery, the customer will be generating revenue from this equipment. You’ve helped them determine the monthly amount they can generate as a result of your technology.
So you suggest financing the purchase to create positive cash flow. You say, “I can’t move from the price, but we are currently offering 0% financing over 36 months.”
0% financing is tough to argue with. Why pay $120,000 now when I can spread it out over 36 months for no additional cost? There’s no catch - this is just a good deal. This moves the customer to a close. But it also serves another important function:
When you discount a $120,000 piece of equipment to $96,000 you inherently communicate that your equipment is not worth $120,000 but instead worth some arbitrary number your sales team makes up. This degrades the value of your product over time. It’s not good, and it’s a slippery slope.
Below-market financing maintains the value of your product but gives the customer a more friendly way to acquire it.
$120,000 financed at 0% over 36 months makes for a monthly payment of $3,333.33
Let’s say the real cost of money is 6%
Your customer will pay $3,333.33 month and your company will be paid a lump sum of $104,612.01 - a blind discount of 12.82%
This maintains the value of your product at $120,000 and saves you $8,612.01 compared to our earlier discounted price of $96,000.
But most importantly, it closed the sale. If you’re carrying a multi-million dollar book of business, closing is everything.
By leveraging below-market financing you were able to meet your customer’s demands, preserve the value of your product, and close the deal fast.
Quick note: this example assumes you’d like to offer 0% financing. With Fortify, you can use this below-market rate as a lever in your negotiation. Maybe instead of offering 0% financing you offer 2.99% - that’s still considerably below market and extremely customer-friendly. It also means you’ll have a lesser blind discount when compared to a 0% offering.
Sales teams using Fortify can set their desired interest rate on any finance option in seconds.
Select any financing option within your opportunity. Adjust the interest rate slider to your desired offering.
This tool gives you a clear picture into what the customer will pay and the total value of your invoice after the blind discount.
When you’re finished, save the financing option and present it to your customer in the customer portal.
Learn how to supercharge your growth through customer financing.
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