Waterfall Financing: Is it Right for Your Business?

Published: December 18, 2023, Last Updated: February 2, 2024

Writer at Finturf.com
Writer: Martha Pierson
Editor at Finturf.com
Editor: Anais Osipova
Reviewer at Finturf.com
Reviewer: Michael Needham

As a seller of products or services, you might think you’ve seen it all when it comes to customer financing. Standard solutions, straightforward process – it all seems to work just fine – until your customer gets denied. You then reach into your network of other lenders to see if you can find a way to offer your customer financing.

You may try two or three options, which is time-consuming and not a great experience for your employees or your customers. But what if there’s a way to elevate your customer financing approach, transforming it from a process that works to a process that is exceptional?

Consumer submitting loan application online to waterfall network

Waterfall financing transforms the point-of-sale financing process by taking a single loan application and running it through a sequential check against multiple lenders. It can maximize approval chances and reduce the hassle for the customer with a single application.

In this blog, we will explore what is a waterfall in finance, its pros and cons, and why you should partner with a Software as a Service (SaaS) provider offering this perk.

What is Waterfall Financing (Lending)?

Waterfall financing is an innovative approach that enhances the consumer financing process. Here’s how it works: when a consumer applies for financing, their application is systematically routed through a series of lenders – known as “first-look,” “second-look,” “third-look,” and so on.

Each lender in the sequence, or waterfall, to different credit profiles and lending criteria. This isn’t just a random sequence; each level caters to different credit profiles and lending criteria. The “first-look” lender typically has the lowest APRs and monthly payments, the highest eligibility criteria, requiring excellent credit scores. If the first-look lender declines, the consumer’s application cascades down to “second-look” lenders, who are often more accommodating, catering to varied credit histories.

In some cases, it may even reach “third-look” lenders, who specialize in financing for those with challenging credit situations. This multi-tier approach seeks out multiple avenues for potential approval, significantly boosting the consumer’s chances of securing financing.

For businesses, waterfall financing means a more efficient, inclusive financing solution, potentially increasing market reach and enhancing customer experiences.

The Pros and Cons of Waterfall Financing

Understanding the mechanics of waterfall financing is just the beginning. As with any financial model, it comes with its own set of advantages and challenges. Businesses must weigh the pros and cons to determine if waterfall financing fits their business model and effectively meets customer needs. 

Happy consumer holding tablet with loan approval information

The benefits to businesses include the following:

  • Expanded Customer Base: By accommodating a wider range of credit profiles, businesses can cater to a larger clientele, translating to higher customer acquisition and retention
  • Improved Approval Rates: Multiple lending options increase the likelihood of customer approvals, enhancing satisfaction and loyalty
  • Enhanced Customer Experience: Offering a seamless, integrated financing solution simplifies the purchasing process, improving the overall customer journey
  • Risk Management: Distributing applications among various lenders can mitigate risk and reduce dependence on a single financing source
  • Increased Sales: With more financing approvals, there’s a higher potential for sales conversions

However, companies must also weigh the drawbacks to make a balanced decision. Here are some of the cons of waterfall financing:

  • Complex Management: Handling multiple lender relationships and agreements can be administratively complex
  • Potential Cost Increase: Fees associated with multiple lenders can add up, impacting profit margins
  • Customer Confusion: Clients may be overwhelmed by dealing with multiple lenders, affecting their experience
  • Integration Challenges: Integrating multiple lending platforms into existing systems can be technically demanding and costly

For customers, waterfall financing benefits them in the following ways:

  • Higher Approval Chances: The tiered system increases the likelihood of finding a financing solution that fits their credit profile
  • Convenience: Customers experience a hassle-free process, as they don’t need to apply to multiple lenders individually
  • Inclusive Financing Options: The system caters to a wide range of credit histories, including those with less-than-perfect credit
  • Quick Decision Making: Fast processing times across different lenders can lead to quicker disbursements if approved

While this financing approach does increase accessibility for customers, there are also drawbacks to consider, including:

  • Potential for Higher Costs: Some “second-look” or “third-look” lenders may have higher interest rates or fees
  • Credit Impact Concerns: Multiple inquiries might impact a customer’s credit score, though typically, this is managed through soft credit checks
  • Limited Control: Customers have less control over which lenders review their applications, which might concern some. 

Should You Choose Waterfall Lending?

As a service provider, embracing waterfall financing hinges on a deep understanding of your business dynamics and customer needs. This approach is particularly beneficial if you find that your customers often face challenges with traditional lending options.

Waterfall lending caters to a diverse financial spectrum, significantly enhancing approval chances, especially for those who might not meet the stringent criteria of prime lenders. If your current financing system yields high rejection rates, transitioning to a multi-lender waterfall model finance could be a strategic move. This shift not only has the potential to increase approval rates but also to drive sales and elevate customer satisfaction.

Loan application form on laptop screen

Implementing waterfall financing can be a strategic move to enhance your service offerings and customer relations. This financing model directly benefits your business by significantly broadening the spectrum of customers you can serve. By providing a more customer-centric financing experience, your business can stand out in a competitive market, fostering stronger customer loyalty and long-term business growth.

As you consider the benefits of waterfall financing for your business, it’s worth exploring solutions like those offered by Finturf. Finturf provides turnkey, cloud-based point-of-sale financing software equipped with a built-in waterfall algorithm. The ready-built financing software seamlessly integrates into your existing systems, enabling you to offer in-house financing directly to your clients.

By adopting a solution like Finturf, your business can seamlessly implement waterfall financing, enhancing customer financing options without the complexities of managing multiple lender relationships. 

Waterfall Financing with Finturf

Why continue using mediocre financing software, especially when consumer demand for flexible, accessible options is increasing? With consumers citing ease of use and flexibility as the top reasons for using financing, businesses must cater to these preferences to stay agile.

Finturf helps businesses meet these consumer demands by offering a financing solution with a pre-built waterfall algorithm. As a result, Finturf makes turnkey in-house financing seamless and hassle-free for businesses. Here are some standout features of Finturf’s waterfall:

  • High Approval Rates: Consumers submit a free online request that is processed by Finturf’s network, starting with an 80% approval rate
  • Diverse Lender Network: Finturf’s partnered lenders have varying eligibility criteria, financial options, and credit score requirements, catering to a wide range of credit profiles
  • Customizability: Businesses can choose which lenders to work with, and the financing offers that are presented to their customers
  • Industry Versatility: The lenders in Finturf’s waterfall cater to various industries, including home improvement, medical, retail, and professional services like tax consulting 


If you still have some questions, check out this FAQ section for clarification:

How Does Waterfall Financing Impact Customer Retention?

Waterfall financing can significantly enhance customer retention. By providing a range of financing options that cater to different credit profiles, businesses using waterfall financing can increase the likelihood that their customers will secure funding. This flexibility and higher approval rate lead to increased customer satisfaction, fostering loyalty and repeat business.

What Is the Typical Timeframe for Integrating a Waterfall Financing System Like Finturf Into My Business?

Integrating a waterfall financing system will depend on the SaaS provider, but the process is fairly quick. For instance, once approved as a merchant by Finturf, integrating a waterfall financing system into your business takes less than an hour. 

Are There Specific Industries Where Waterfall Financing Is More Effective?

Waterfall financing is particularly effective in industries with a wide range of customer financial profiles or where high-ticket purchases are common. This includes sectors like retail, home improvement, medical services, and automotive. In these industries, the flexibility and increased approval rates offered by waterfall financing can significantly boost sales and customer satisfaction.

Can Waterfall Financing Be Customized to Align with My Business’s Specific Credit Risk Appetite?

Yes, waterfall financing can be tailored to align with your business’s specific credit risk appetite. Platforms like Finturf allow businesses to choose which lenders they work with and the financing offers that are presented to customers. This customization enables businesses to manage their credit risk exposure while offering various financing options to meet their customers’ needs. 

Sum Up

Embracing waterfall finance can be a game-changer for your business, offering a broader reach and enhanced customer satisfaction. It’s about finding the perfect balance for a hassle-free request process for you and your customers. Discover more with Finturf and unlock the potential of tailored customer financing solutions.

Martha Pierson

Content CreatorMartha Pierson is a marketing strategist and business development expert based in Glendale, California. As a content creator for the Finturf blog, Martha shares her vast knowledge and experience with readers to help them build and sustain successful businesses. Her articles offer practical tips and actionable advice that entrepreneurs can implement immediately to achieve their goals. Martha also provides insightful analysis of current trends across different industries and offers expert guidance on how businesses can adapt to changing market conditions.

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