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.
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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.