If you are creating your proposals with OnCall Air, you can easily add the financing cost into your proposal. If you would like to learn more, check out How to control the cost of financing?. However, how can you accurately calculate the financing cost into your proposal if you are doing this manually?
When offering financing, a contractor must keep in mind the cost associated with it. Make sure you know what the merchant fee is to build your proposal accordingly if your goal is to cover this fee and not have it become a cost to you.
For this explanation, we will use the following numbers:
Cost of the system if the customer paid cash = $5,000
Merchant fee or financing cost for the contractor = 11%
By looking at these numbers, you may be inclined to calculate what 11% of $5,000 is and then just add it to the total, but will this cover the cost completely? Not really.
Let's do the math to find out:
5,000 x 0.11 = 550
5,000 + 550 = 5,550
If you present your proposal for $5,550 and successfully close the deal with financing, the lender will then charge you the corresponding 11% merchant fee:
5,550 x 0.11 = 610.5
As you can see, you just lost $60.50, since the cost was not calculated right:
610.5 - 550 = 60.5
How to prevent this from happening?
The correct way would be to divide the cost of the system if the customer was paying cash ($5,000) by 1 minus the financing cost percentage (1 — 11% or 1-0.11 =0.89) :
5,000 ÷ 0.89 = 5,617.98
The sales price including the cost of financing should be $5,617.98, or you can round it up to the nearest $, making it $5,618.
To check for accuracy, take 11% of the sales price and then subtract that from the sales price itself. You will get the cost of the system if the customer paid cash:
5,617.98 x 0.11 = 617.98
5,617.98-617.98 = 5,000
You will get the same, if you are choosing to round up the sales price and fee to the nearest $:
5,618 x 0.11 = 617.98 = 618
5,618 - 618 = 5,000
Now it looks like you have successfully covered the entire cost of financing. You are ready to build your proposal including the financing cost, having the peace of mind that this won't become a cost to you!
Cost of financing, calculate finance, fees, merchant fee