How to Bake in Merchant Fees into your Pricing

Simply put, merchant fees are the businessperson’s cost of offering financing to customers. Every HVAC contractor needs to account for this cost in their pricing. But it is can be tricky to figure out how to do it.

In the short presentation below, Fortiva Retail Credit’s VP of Client Development, Addison Mow, shows you the most effective way to deal with merchant fees. Plus, he shares a calculator you can use to plug in your own merchant fee costs.

You can read the full transcript below.


Addison Mow (Presenter): Hey, guys, I appreciate everyone joining and jumping on.

So if you’re on this webinar today, obviously it’s because you either offer financing – and you want a little more info on how to bake in these fees and cover your cost of both Prime, you know first look, and Second Look financing. Or maybe you’re new to financing, and you just want a little more info on how that works. And again, might have some questions about covering this cost – and if you can pass them along to your customers.

So I’m going to share my screen. We’ve got a short Powerpoint. Again, we’ll be conscious of everyone’s time here and keep this relatively high level. But to Fio’s point, go ahead and ask any questions you guys might have. So, does my screen look good?

Fio (Host): Looks great.

Why offer financing?

Addison Mow (Presenter): Perfect. So the first thing we’ll talk about is, why is financing a powerful tool. As I mentioned, if you’re already offering it, you get it. If you’re new to it, here’re a few points for you:

  • Currently, 75% of home improvement projects over $2,500 are financed.

Given today’s economy (with everything going on), it is extremely important to be able to offer financing effectively – because more and more people are choosing that as a payment option.

Also to that point, think of how many of your jobs are over $2,500 in total costs. Probably a very large amount of them. So what you want to be able to do is – effectively offer financing to not really lose out on any sales. And you’re able to close all the sales you can with all the weapons that you have available to you.

  • 57% of Americans have less than $1,000 in savings.

So that just goes to show – you need to have multiple payment methods for your consumer to have in order for you to close that sale. I mean offering payment options. Specifically, financing doubles the project size because consumers may be able to afford that upsell that you’ve presented to them when you break it down into a monthly payment. Or, otherwise, they would not be able to, if they need to come out of pocket for it – with cash.

What does offering financing cost?

One of the main questions is, what’s the cost of offering financing right? So there is a cost. Whether it’s to you as a merchant; whether it’s to the consumer. Obviously, today we’re focusing on the merchants. So you do have merchant fees, whether it’s through a prime lender, for a sub-lender, or a Second Look lender.

The percentages will vary, depending on the type of plan. So you know – if it’s a promo with deferred interest, if it’s a long-term, a standard term loan, it’ll vary based on that type of plan.

It will also vary based on the APR that’s showing up on the customer’s end. It’s also going to vary based on the consumer that the plan targets.

Prime Lenders

And what do we mean by that? First is prime lenders, right? So prime lenders focus on customers with higher FICO scores – generally the good to excellent ones. We say, 600 to 800+ is what we’ll call the good to excellent scores that primes are looking for. Their fees could range anywhere from 0% – with some of the higher APR plans all the way to 27%. Again, depending on the specific qualities or characteristics of those plans.

Second Look Lenders

Second Look lenders, specifically Fortiva, is where we’re pulling a lot of this info from. We’re going to focus on customers who are not approved by the prime lender. So those customers might be considered a little more risky. More likely to default. Become delinquent on those loans – generally a lower FICO score.

We work with anything between 500 to 680 – this is kind of the range we see. Maybe they have a decent FICO score. But their debt to income is a little bit off, right? Just something that’s not as desirable to a prime lender as what you’re going to send the Second Look lenders.

You will see slightly higher fees with a Second Look lender – slightly higher average fees. There may be some prime First Look fees for plans that are a little bit higher. With Fortiva all of our plans; all our approvals are a flat 9.9%. So, it’s easy to build in and bake that into your overall cost. When we look at how to do that.

Passing on the fees to customers

Another question we get a lot. Can I pass these merchant fees on to your customers? The short answer is, yes. You just want to make sure you’re doing it effectively and efficiently, right? So we see some inefficient methods. And we see efficient methods. And we’re going to touch on both very quickly here.

The most common inefficient method we see is just simply going back and charging on a per-job basis. Going back and charging a higher price on a per-job basis to customers who choose to use financing as their form of payment, right?

So you go. You present the job. You give the price quote. The customer says, “Okay, I’d like to finance this.” And then you kind of have to backtrack. And say, “actually, if you’re going to finance, that payment is gonna be a little bit higher. That overall cost is going to be higher for you.” That’s the least effective way we’ve seen to do so.

Baking in merchant fees into your pricing

What you want to do is bake in financing costs to your overall price book. It is very simple. You’re just going to calculate your overall cost as a form of financing. Or as a percentage for all forms of financing that you offer. So, it’ll be your first look, Second Look. If you offer some sort of tertiary plan – throw that in as well. For purposes of this presentation, we’re gonna focus on First Look and Second Look. And then you simply increase your overall price book by that percentage. You’re going to charge that price to everyone. Regardless of if they’re paying [with] financing; they are paying cash, check, [or] credit card.

Adding SecondLook merchant fees

The question I get is: when you are including a 9.9% average Second Look fee. A lot of people look at that and say. “Look, how much am I really going to have to increase my prices right to cover that cost, right? That 9.9% average is a lot higher than my average prime cost. But what you’ll find is – you’re gonna fund a lot less through a Second Look lender than you will a prime lender.

Our general rule of thumb that we use in the second world. About 15% of your financing volume comes through Second Look financing. So, you’re gonna see a much lower average cost for your Second look Financing – when you put that into your total funded volume.

Generally, when we look at baking in merchant fees, you’ll have to increase your price book by less than 1%. And in a lot of cases, less than half a percent on top of your prime costs, just to cover any Second Look cost that fall in there.

In addition, there’s a little bonus when you do this I mentioned. It is called charge the same – whether or not a customer’s paying, financing, cash, check, [or] credit card. When a customer pays by cash, check, or credit card – your blending cost will ensure a bit more profit. And that’s going to help you recoup whatever additional cost you do have from increasing that price book amount, right?

So if you’re paying, I don’t know what the rate is right now, but 3.75%, or whatever on credit cards. And you’re increasing your price book by – whether it’s 5 1/2 or 6% – that helps you ensure a bit more profit and cover any additional charges or costs on top.

Simple math. This is an example. Fio did mention a tool we’re going to distribute at the end.

Doing the math

You guys will have an interactive version of this calculator. You can use to plug in your own numbers just to see on the bottom line. Hey, this is what I would need to increase my price book by.

So if we’re looking here very quickly, very simply. First in line is the prime lender. And this is based on a $1 million and funding volume just for easy numbers. But if we’re doing $850,000 through the prime lender. And an average cost of 8% – we’re looking at a cost of $68,000 for First Look through the course of the year. When we look at Second Look, we’re following that 15% rule, right? 15% of your financing will be Second Look.

We’ll say $150,000 at 9.9%, which is our fee. It’s gonna cost $14,850 through the course of the year for a grand total of $82,850.

If you look at that as a percentage of $1 million in overall funded volume. You’ll see that comes out to 8.2% fee. All you’re having to do is increase your price book by .02% to cover that 9.9% MDR. On top of the 8% that you were probably already planning on – if you’ve done your prime math.

Why offer Second Look

So, you’ll see it’s a lot more affordable to provide Second Look than a lot of people think. At first glance, from looking at the higher average MDR – as the highest average merchant fee. Fortiva’s Second Look – and these are just some statistics we’ve pulled from our internal data. When offering Second Look, in addition to prime lending, you can increase your average ticket size by an additional 35%.

We’ll help you get up to a 50% increase in approvals. Just because again, we’re looking at that demographic that primes are not going to want to approve. And we’ll be more lenient with some of those numbers.

And, you’ll see an increase in repeat transactions. Around 25% is kind of where we’ll see this. Simply because customers who qualify for Second Look probably don’t want to go through the process again of applying for loans, putting in applications. Playing guessing games, and saying, “hey, can I get approved for a loan down the road?”

If they already have an account with Fortiva, they have the ability to reuse that account. If they have an open-to-buy amount. And reuse that with your company – whether it’s for service, job, a new install, whatever it is, they can come back and use that existing account with you.

Once you are done with the job, you fund it. And we’re going to do the rest as a Second Look company. This kind of goes back to why Second Look fees are a little bit higher. In that demographic being a little more risky – you get paid the job amount as soon as you request funding, minus the merchant discount rate.

It’s our responsibility to communicate with your customer and collect those payments. So, if the customer stops paying. If they become delinquent. If they default on that loan. You’re not gonna know it whatsoever. It’s not gonna affect you in anyway. We’re taking on that risk. We’ll handle it.

But again, that’s why there is a little bit higher merchant fee – which we are having this conversation about, right? Baking in the fees. And you move on to the next sale. Helps keep you guys running as a well-oiled machine. As a company, keeps you efficient. And to make sure you can get as many jobs in as you can to maximize profit on your end.


And just very quickly if you offer Fortiva already, awesome. If you don’t, we do have a few requirements to offer Fortiva through the Credit for Comfort platform.

First is, your company does need to be in business for 2 years.

And second – it does need to have a minimum of $1 million dollars in annual revenue. That’ll get you through our merchant underwriting.

Start Offering Financing with Credit for Comfort

Talk to our success team about how easy it is to start offering financing and increase your sales with the Credit for Comfort app

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