If you own a small business, the money your customers have may affect how well your business does in the long run. This is especially true if you sell or offer services that cost more. So how do you get people to buy something and check out without lowering your prices and hurting your bottom line? In this article, we will understand how small businesses can offer customer financing?
Customer financing or offering financing to customers is one possible solution. Customer financing, which is also called consumer financing, is a way to buy something now and pay for it later. You can offer to finance yourself, or you can use a third-party financing company. Customer financing can be good for both the customer and the business owner. The customer gets the product they want, and the business owner sells more full-priced products and services.
Kinds of customer financing.
Primary financing is when a business acts as a lender and gives its customers its own financing programme. Most of the time, a business has to do more work to get primary financing than it does to get third-party financing.
Third-party financing is a type of financing where a third-party financing provider acts as a lender at the point of sale for a small business. In most of these programmes, the customer signs up for a payment plan to pay off the full cost of a purchase over time, usually by making payments every month.
How to offer customer financing?
Follow these steps to give your customers financing options:
- Review your financing options for customers and decide which ones to offer.
- Tell your customers what financing options they have.
- Accept and review customer financing applications. (If you offer in-house financing, you will need to use an evaluation process to figure out if a customer is creditworthy. If you decide to work with a third-party consumer financing company, the company will decide whether a customer is approved or not.)
- Finish the deal
- Collect payments from customers according to the payment plan.
- Options for small businesses to get loans from consumers
- Personal loans
If your business sells more expensive goods or services, in-house financing may work well for you. Customers may want to pay for things like furniture, appliances, electronics, or home repairs and improvements with a loan.
For in-house loans, you’ll have to pay for credit checks and payment collection, which require both software and staff, as we’ve already said. You’ll also need to set up a credit policy for your business and decide how you’ll deal with customers who want to pay you in parts.
Consumer loans from a third party.
Businesses of all kinds, especially online retailers, are using third-party consumer financing more and more. Some popular online third-party lenders are:
- Quadpay
- Klarna
- AfterPay
- Affirm
- PayPal
Most of the time, these third-party lenders don’t charge interest and let customers put partial payments toward the cost of the items they buy. Instalment payments are usually due every two weeks or every month.
If you use a third-party consumer financing service, you’ll have to pay a fee for each transaction or a flat monthly fee. When you use a third-party financing company, they do a lot of the work for you. You don’t have to worry about credit checks or getting payments.
Pay by Layaway.
Layaway is a way to pay for something where a business holds an item for a customer until the customer pays for it. Usually, the customer pays for the item in a series of smaller payments. In a layaway agreement, unlike other ways to pay for something, the customer doesn’t get the item until it’s been paid for in full.
Under a layaway agreement, the item will be returned to stock if the customer does not pay for it in full. Depending on the agreement, the customer’s money may be returned in full, minus a fee, or lost. Some businesses choose to charge a fee for holding an item until the customer has paid for it.
As credit cards became more common, layaway became less popular, but it may still be a good option for some businesses and customers. Most of the time, a layaway agreement lets the customer avoid paying interest, and the price of the item stays the same. Layaway agreements reduce the risks for the seller and can be offered to customers with bad credit.
Advantages (Pros) and Disadvantages (cons) of offering to finance to customers.
Small business owners should think about the pros and cons of offering to finance to customers.
Advantages of financing for consumers.
Increase order values: When businesses offer customer financing, the average order size goes up by 15%. In turn, more money comes in from larger orders, which helps your bottom line. Plus, the customer gets to buy exactly what they want instead of an option that might not be exactly what they need.
Less hassle: If you work with a third-party financing provider, you don’t have to worry about managing accounts or dealing with people who don’t pay. Instead, you can focus on growing your business and rely on a more steady flow of cash.
Close more sales: When consumers are deciding whether or not to buy, the initial cost and sticker shock can be a big problem. But if you can spread out the cost of a product or service over a few months, customers might be able to afford those smaller payments. “Buy now, pay later” is a great way to close more sales for both expensive items and large orders of less expensive items.
Disadvantages with financing by the customer.
Fees and other costs: If you use a third-party lender, you’ll probably have to pay fees. In some cases, you will have to pay a flat fee every month, while in others, you will have to pay a percentage of each transaction. If you want to do your own financing, you may need to invest in both people and software.
Minimum Amount needed: Before you can offer financing to customers during checkout, some providers need a certain amount to be spent.
Customer acquisition costs: Financing is a great way to get new customers, but the money you pay might not be worth it. After a few months of using customer financing, you should look at the return on investment to make sure it’s a good choice for your business.
How much does financing for customers cost?
How much it costs to add customer financing to your business model will depend on which financing service you choose.
For in-house financing, you’ll have to pay for things like checking customers’ credit and collecting payments. You’ll also need labour to process and finish these administrative tasks, which will add to your costs.
You’ll have to pay a fee to use the services of a third-party lender. The fee could be a percentage of each transaction or a flat fee that you pay every month.
Should you offer to finance to customers?
At the end of the day, it’s up to you if you want to offer your customers a financing programme or different financing options. Whether you choose to use point-of-sale financing from companies like Affirm or Klarna or do your own financing, these options can help you make more sales.
