Glossary: Waterfall finance
What does waterfall mean in finance?
Waterfall finance is a model wherein shoppers apply for consumer financing through a single application and undergo an automated tiered and cascading evaluation.
This evaluation systematically sifts applicants through different lender categories, starting with prime lenders. If applicants meet the criteria for prime lending, they are approved at that level. For those who do not qualify for prime lending, the waterfall financing process then directs them to near-prime lenders. Finally, if eligibility is not met with near-prime lenders, the process further cascades down to subprime lenders or lease-to-own financing options.
How Does Waterfall Financing Work?
Waterfall financing works by automatically routing a single credit application through multiple lenders, starting with prime options and cascading to near-prime and subprime tiers until an approval is found.
Key elements of waterfall finance:
- Automated tiered evaluation: Waterfall finance employs an automated process that categorizes applicants into different tiers based on their creditworthiness. This tiered evaluation determines the eligibility for various lending categories.
- Prime lenders: Applicants with strong credit profiles are initially directed to prime lenders. These lenders offer favorable terms and conditions to creditworthy consumers.
- Near-prime lenders: If applicants do not meet the criteria for prime lending, the waterfall financing structure guides them to near-prime lenders. Near-prime lenders cater to individuals with slightly lower credit scores but who may still qualify for competitive financing terms.
- Subprime/lease-to-own options: For applicants who do not qualify for prime or near-prime lending, the waterfall finance process leads them to subprime lenders or lease-to-own financing. This tier serves individuals with less favorable credit profiles, providing alternative financing solutions.
Waterfall Finance vs. Single-Lender Financing
Unlike single-lender models that rely on one financing source, waterfall finance connects shoppers to a network of lenders through a single application, increasing the likelihood of approval and offering more flexible terms.
What is the Application of Waterfall Financing within Consumer Financing?
- Efficient approval process: Waterfall finance streamlines the approval process for shoppers applying for financing at the point of sale. It ensures that applicants are directed to the most suitable financing option based on their creditworthiness.
- Optimized customer experience: By automating the tiered evaluation, waterfall financing enhances the customer experience by swiftly connecting shoppers with the most appropriate lenders, optimizing the likelihood of approval.
Benefits of waterfall finance in consumer financing:
- Maximized approval rates: Waterfall financing maximizes approval rates by systematically directing applicants to lenders matching their credit profiles, increasing the chances of success.
- Tailored financing solutions: Merchants deliver tailored financing solutions by offering prime, near-prime, and subprime/lease-to-own options, catering to a diverse range of consumers with varying credit histories.
- Efficient risk management: Enables efficient risk management by categorizing applicants based on creditworthiness, allowing lenders to align their risk exposure with the appropriate financing terms.
A shopper applies for financing at checkout through a merchant powered by ChargeAfter. The system first checks prime lenders; if declined, it instantly routes the request to near-prime and subprime options. Within seconds, the shopper receives an approved offer, no reapplication needed.
Waterfall finance optimizes the financing journey for shoppers by automating the application process with omnichannel lending and directing them to lenders tailored to their credit profiles, ensuring a seamless and efficient financing experience.
FAQ
In consumer lending, waterfall finance is a structured, automated process that connects shoppers with the best possible financing options based on their credit profile. Instead of applying separately to multiple lenders, shoppers complete one application on ChargeAfter’s multi-lender platform, and are automatically routed through a tiered “waterfall” of lenders, starting from prime and moving through near-prime to subprime or lease-to-own options. This approach simplifies access to credit and ensures that more shoppers can find financing that fits their financial situation.
Waterfall financing improves approval rates by intelligently matching each applicant with the right lender for their credit level. If a shopper doesn’t qualify with a prime lender, the application automatically flows down to the next suitable tier, such as near-prime and subsequently subprime, until a match is found. This cascading structure reduces declines, increases the likelihood of approval, and helps merchants serve a broader range of customers without additional friction or manual intervention.
A wide variety of lenders participate in waterfall and embedded lending networks, from established banks to innovative fintech startups.
These networks often include:
- Prime lenders – Offer the most competitive rates to borrowers with excellent credit.
- Near-prime lenders – Serve consumers with moderate credit scores who may not qualify for prime terms but still maintain strong repayment potential.
- Subprime and lease-to-own lenders – Provide financing options for shoppers with limited or challenged credit histories, ensuring inclusivity and broader financial access.
- B2B lenders – Enable financing for businesses purchasing goods or services, expanding the waterfall model beyond consumer credit.
This diverse mix of lenders creates a robust ecosystem that supports consumers and businesses across the full credit spectrum.
ChargeAfter powers the largest independent network of lenders in this space, connecting merchants and financial institutions to a broad range of prime, near-prime, subprime, and B2B lenders.
ChargeAfter’s platform powers a waterfall financing model through its multi-lender network and decisioning engine. When a shopper applies for financing at checkout, ChargeAfter’s technology automatically routes the application through a hierarchy of lenders in real time. This enables merchants and financial institutions to:
- Offer instant credit approvals across multiple credit tiers
- Maximize customer conversion and approval rates
- Deliver a seamless, omnichannel financing experience
- Reduce operational friction with automated decisioning
By leveraging waterfall finance technology, ChargeAfter ensures that every customer, whether consumer or business, has access to the best personalized financing choices available.
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