Ann: Big Un Limited Market Update- Finstro, page-53

Ok. This is how it works. A retailer (in this case BIG) offers interest free periods to their customers so they can afford to buy big ticket items. The retailer does not provide the "financing" themselves, as this impacts their working capital. BIG has to pay for the costs of the video production upfront so working capital management is important. So they use a third party financier.

In Australia, this is usually done through GE Finance or Flexigroup, who fund pretty much every big retailer in Australia. Afterpay is a new entrant to the market. So the only unusual thing about the BIG arrangement is that they are not using GE or FXL.

The financier does not loan money to the retailer. It effectively buys the customer debt from the retailer at a discount. The amount of the discount will depend on the length of the loan. Say the sale was for $1000, the financier buys it for $850. The customer pays the full $1000 to the financier, not the retailer, over the "interest free period". The financier pockets the $150 difference as interest. The retailer pockets the $850 straight away and can spend it without suffering a working capital deficit.

If you take the example of Harvey Norman, it promotes its interest free periods as part of its normal business offering, but if you've ever signed up for one you will realise you are actually taking a credit card from GE Finance (the GEM card). Your debt is owed to GE, not Harvey Norman. The credit risk is with the financier, not the retailer. Which is why retailers dont mind selling them.

Why would BIG want to do its own financing? To get that extra $150. After all, its why GE set up GE Finance in the first place. To fund its own customers' purchases. The Finstro loan period is 6 months (according to its web site) so BIG should have a pretty good idea what the default rate is like, and how their discount rate compares to borrowing money from a bank and simply funding their own working capital.

Note, that in the US the customers dont pay upfront but pay monthly, so BIG is funding its own working capital deficit. This places limits on how fast the company can grow, so using a third party financier there would make sense.