Choosing between indirect and direct lending

Though a fairly narrow specialty, there are two types of lenders in home improvement financing. The majority by volume are indirect lenders, a list of banks and finance companies that includes Medallion Bank. The majority by numbers are direct lenders.

Direct lending is what most people think of when talking about lending. A direct lender works directly with a contractor’s customer to take a credit application and coordinate the resulting loan. Most direct lenders providing home improvement finance are local or regional banks who have fallen into this specialty. There are also a couple of larger direct lenders focused specifically on the contractor market. The advantage of direct lending is the ability to hand off the customer and not worry about the financing details. Many contractors like this, particularly smaller contractors who want to focus on doing the work and not the money behind it.

Indirect lending is so called because the contractor performs many of the loan process administrative tasks on behalf of the lender. For example, the contractor typically takes the credit application and delivers it to the lender. The contractor then might also coordinate the signing of the documents. Communication flows from the lender to the contractor to the consumer and vice versa. The advantage of indirect lending is control. In exchange for taking on some of the administrative work, the contractor removes the uncertainty associated with how the job will be financed. As the intermediary, the contractor also controls how much the financing will cost them and stays abreast of all issues and details throughout the process. Larger contractors typically find indirect lending attractive, many of which put together finance teams like those you’d see at an auto dealership.

As technology advances, the line between indirect and direct lending gets blurry. For example, we offer electronic documents for e-signing and those documents are passed between us and the consumer without going through the contractor. This would reasonably be viewed as direct lending-like, but we communicate the document status so it still has some of the advantages of indirect lending. So how do you choose which is right for you? It is often as simple as deciding whether or not you want control of the lending process. If control matters to you – and we’d be happy to talk with you about all the ways it is advantageous – indirect lending is the right choice.

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