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The Borrowers

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Q: I'm seeking information on instituting a rent-to-own and layaway program for a small retail business. Can you offer advice on calculating the rate of interest to charge, determining the length of the rental contract, the rate of depreciation for the merchandise and other information for providing these types of customer financing?

A: Provided by Gary Romine, president of Show-Me Rent-To-Own Inc. in Farmington, Missouri. He has 14 years of experience in the rent-to-own business.

There are laws in 44 states defining the rent-to-own transaction. The most common interpretation of the transaction is the right to rent a product for a week or a month with a right to return or renew without obligation. The rent-to-own agreement may include options to own, but the customer has no obligation to commit to own. If your agreement requires, for example, a minimum commitment of four months, you may need to review the lease law, which may forbid you from requiring such a commitment.

You mention "rate of interest" and refer to the transaction as a type of customer financing; this is a big error. No debt is incurred in a rent-to-own transaction-the customer can return the product at any time. And because there's no debt, there's no interest.

The rent-to-own business is a service industry, so you must consider the services you'll offer and analyze their costs to determine rental rates. These services are commonly included in the rental price:

*Right to return: A washer and dryer rented for a month, then returned, must be cleaned and prepared for re-rent.

*Delivery, setup and pickup: What will your employee, vehicle and equipment expenses be?

*Service/repair: Manufacturers' warranties may cover new products, but because the product is yours, any additional service is at your expense until a product is sold.

*Loaner: When a rental unit is being repaired, a loaner is usually offered to the customer.

*Clerical: Many customers pay weekly. This requires additional hours to process payments.

Review your state's law concerning rent-to-own. The industry standard for depreciation is three-year MACRS, a system determined by the IRS and the federal government.

A typical rent-to-own store is set up similar to an electronics store. Because the business' success depends on great customer service, emphasis should be placed on aspects such as quick delivery, repairs within 24 hours and convenient payments.

A: Provided by Bruce W. Van Kleeck, vice president of member services at the National Retail Federation in Washington, DC.

When developing a layaway program, ask yourself: Is the merchandise you sell appropriate for layaways? Are the items you carry things customers might typically purchase on credit? Layaway is an alternative for customers who either can't or choose not to buy with credit cards.

If you begin a layaway program, state your policy in writing and have the customer sign the agreement. Keep a copy for your records, and give one to the customer. The agreement should include your business name and address, the customer's name and address, a description of the merchandise, the deposit amount, a schedule of payments, the refund policy and any other requirements.

The customer must be informed whether the merchandise is being held in the building where the original purchase was made and is available for immediate pickup, or whether it will be obtained from another location upon final payment. You can't increase the price of the item during the layaway term.

A number of state laws may affect layaway policies. Consult your attorney, the local Better Business Bureau, your state's consumer protection agency and the Federal Trade Commission in Washington, DC, for laws that apply in your area and industry.

Many retail chains have abandoned layaway programs in favor of "interest-free credit" terms based on certain spending and time requirements. Layaway programs are now most common in discount or smaller retail organizations. Establishing a free "customer hold policy" with a limited time period (48 or 72 hours) may be a more practical alternative to a layaway program.

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