What Is Customer Financing and How Does It Work?
Customers may use consumer finance to set up a payment plan for products or services. The merchant gets full payment up front, similar to a credit card. The goods is delivered immediately, but the buyer must pay over time. The merchant may have to pay a modest fee for each funded transaction, and the consumer is usually charged interest on the financing.
The next step after establishing a company is to figure out how to get and keep consumers. Of course, in order to do so successfully, you must adapt your company to your client base’s requirements, desires, and finances. Offering client financing, depending on the kind and pricing of your goods, may be a fantastic method for you to boost sales and customer loyalty.
What is customer financing and how does it work? Instead of paying the whole price of a costly item up front, your consumers may enroll in a reasonable payment plan via customer financing. Customer financing is intended in this manner to convert customers from just considering shopping in your business to really purchasing your goods.
Customers financing is offered by both small companies and bigger brands in order to turn more visitors into purchasers. If this seems like something that might help your company, you might be asking, “How can I provide financing to my customers?” We’re here to assist you. We’ll go through your customer financing choices, how to choose a financing scheme that fits your company and tastes, and whether or not you should provide customer financing at all.
How to Make Financing Available to Customers
Customer financing, as previously stated, provides alternatives for consumers who want to purchase your products and services but can’t afford to pay the whole amount up front. When you sign up for a payment plan, an item that costs $500 becomes accessible to your client for five $100 installments (plus a small interest rate). By providing financing to your consumers, you essentially make your goods or services more cheap to them.
Offering finance to consumers improves buyer conversion and customer loyalty on the merchant’s end. Offering consumer financing alternatives, according to one research, boosts a customer’s average purchase amount by 15%. [1] Furthermore, 93 percent of consumers who utilized credit alternatives in this survey indicated they would use them again.
As a result, if you believe that consumer financing may help your small company, you’ll need to learn how to provide finance to your customers. Overall, there are two primary approaches to providing consumer finance. The first alternative is to do your own credit checks, provide loans, and handle payment collection. This method, on the other hand, takes a long time and comes with the legal obligations that come with using consumer credit information.
As a result, the second alternative is to depend on a third-party company to provide finance to your consumers. Working with a third-party supplier relieves your company of the responsibility of generating credit offers and collecting client payments, saving time and removing certain legal concerns.
Let’s look at how the process works because the latter is likely to be the best choice for most companies. Here’s how you provide loans to consumers while working with a third-party provider:
The consumer first sees a product or service that they want to purchase, either in-store or online.
The client will then ask for financing since they cannot pay the entire amount but still want to purchase the goods. You’ll want to make sure that customer financing is well-publicized so that prospective purchasers are aware of the possibility. Customers will be able to apply for financing via the online checkout cart, their cellphones, or your POS system, depending on your company. Your finance provider may conduct a credit check on the client at this point.
Your client will know if they have been accepted or refused for credit in seconds. If the client is authorized, you will immediately get full payment for the goods.
Your client will get the goods or service right away, but they’ll have to pay the finance company in installments. The payment plan for the client and how much of the purchase they must pay ahead will be determined by the supplier with whom you deal.
Unless the finance provider offers a promotional rate, the client will be required to pay an interest rate. Furthermore, like with any other credit card processor, you may be required to pay a small percentage every funded transaction.
As you can see, the process of providing client finance is really very straightforward. When it comes to how to give financing to your clients, the first essential step is to choose the finest supplier for your company.
Financing Providers with the Most Experience
Although there are hundreds of companies that may assist businesses in offering client financing, not all of them are appropriate for small enterprises. Many of these companies impose monthly sales minimums or a set amount of financed purchases, and they take a significant share of financed transactions.
As a result, if you decide to provide financing to your clients, you’ll want to be sure you choose the appropriate supplier. To help you get started, we’ve compiled a list of consumer financing companies with low costs and no minimums, making them excellent choices for small businesses. Furthermore, when you use one of these digital platforms, your customers may apply for financing in your shop, online, or via their cellphones.
Consider the following five customer-financing platform
Although there are hundreds of companies that may assist businesses in offering client financing, not all of them are appropriate for small enterprises. Many of these companies impose monthly sales minimums or a set amount of financed purchases, and they take a significant share of financed transactions.
As a result, if you decide to provide financing to your clients, you’ll want to be sure you choose the appropriate supplier. To help you get started, we’ve compiled a list of consumer financing companies with low costs and no minimums, making them excellent choices for small businesses. Furthermore, when you use one of these digital platforms, your customers may apply for financing in your shop, online, or via their cellphones.
Consider the following five customer-financing platform
Viabill
Viabill is a finance platform for internet small companies. Customers may divide the cost into four equal monthly installments instead of paying the entire purchase price up once. Whether you’re running an ecommerce store on Shopify, Magento, WooCommerce, or another platform, Viabill can be integrated into your online checkout in a matter of hours. Typical online credit card processing costs are 2.90 percent + 30 cents each transaction.
There are no credit checks when consumers sign up for financing via Viabill, and they will know whether they are accepted nearly immediately. Viabill demands a 25% down payment at the time of purchase, then evenly divides the remaining three payments—no interest or extra costs. Viabill is a particularly notable choice for online-based companies because of their many direct ecommerce connections.
PayPal
PayPal Credit is one of several popular small business solutions offered by PayPal, although you may not be aware of it. PayPal Credit is a fantastic option for online companies to provide client financing, especially those who use PayPal as a payment method. When a client pays out using PayPal on your website, this program allows you to add a financing button or banner to the online checkout. Your customer’s credit decision will be made in seconds by PayPal.
For businesses that currently accept PayPal, the PayPal Credit service is free, so you’ll just have to pay your existing PayPal transaction costs to provide client financing. Furthermore, if consumers pay in full for a product or service worth at least $99 within six months, they will not be charged any interest. So, if you currently use PayPal, you should think about using their credit facility to provide your consumers finance.
Financeit
Financing is available for purchases up to $60,000 via Financeit. Transaction costs are not charged, and the basic program is also free. Your client may apply for Financeit customer financing using the Financeit digital tools on their smartphone at your shop or on your website, and if accepted, they can have money the following day.
Then, within two business days, Financeit sends you the entire payment amount, and the firm handles the rest. Your client will be charged an interest rate based on their creditworthiness, location, and payment plan length. Financeit is an excellent choice for companies that offer higher-priced products or services, such as furniture or other home renovation items and services, since they have a $60,000 financing cap.
Financing is available for purchases up to $60,000 via Financeit. Transaction costs are not charged, and the basic program is also free. Your client may apply for Financeit customer financing using the Financeit digital tools on their smartphone at your shop or on your website, and if accepted, they can have money the following day.
Then, within two business days, Financeit sends you the entire payment amount, and the firm handles the rest. Your client will be charged an interest rate based on their creditworthiness, location, and payment plan length. Financeit is an excellent choice for companies that offer higher-priced products or services, such as furniture or other home renovation items and services, since they have a $60,000 financing cap.
Your clients may check their financing possibilities from the comfort of their own homes with LendPro’s customer finance platform, which connects with your small business website. They collaborate with businesses that offer high-priced products, such as home furnishings, automobiles, and jewelry. You may also purchase application kiosks from LendPro to put in your shop. If your client chooses to go with a payment plan, LendPro gives them the opportunity to compare many alternatives throughout the application process. They provide payment plans and interest rates for people with various types of credit and different payment quantities.
LendPro’s enterprise solution and their financing in a box solution are both available to company owners that want to provide client loans. You’ll have to contact LendPro and deal with them directly to find out how much each option will cost. With choices for both small and big enterprises, LendPro may be a viable solution for a broad range of companies.
Afterpay
Urban Outfitters, Anthropologie, and Everlane have all used Afterpay as a consumer financing tool. Unlike LendPro and Financeit, which focus on large-ticket purchases, Afterpay funds smaller discretionary expenditures like clothes, jewelry, and housewares.
While exploring your online business, your customers will see the Afterpay option and will be able to fill out a little form to get an immediate acceptance decision. If the order is accepted, the client may pay for it in four equal payments, the first of which is due immediately. Customers may take advantage of zero-interest financing and no fees if they pay on time.
Afterpay will immediately pay your company the entire amount of the transaction, allowing you to dispatch orders as usual. You will be charged 4–6% + 30 cents each financed transaction if you use the Afterpay program. Furthermore, Afterpay connects directly with leading ecommerce systems like as BigCommerce, Shopify, Magento, and others, making it a fantastic, fast, and simple option for small online companies.
Financing Fees to Customers
Finally, as we’ve shown by looking at these five various suppliers, the cost of client financing is determined by which one you choose.
However, you’ll want to do a cost-benefit analysis before deciding whether or not to provide financing to your consumers. Despite the fact that you’ll likely convert more consumers and sell more, the financing costs must be reasonable for your business.
A few schemes, such as PayPal Credit, don’t charge the merchant any extra costs, as we stated before. Most consumer financing schemes, on the other hand, charge companies a 2–6% transaction fee plus a set $0.20 to $0.30 fee each transaction, which is comparable to the per-transaction cost of taking payments online through a payment processor. A few other companies, however, impose a monthly fee of $40 to $50 for a certain or unlimited number of funded transactions.
As a result, having a few months of data to examine while evaluating the cost-benefit analysis is helpful. You can make an educated choice about whether or not to provide client financing in the long run after you know how many customers are using it and how much it costs you.
Small Business Customer Financing: Benefits and Drawbacks
When adopting a new company model, you should constantly evaluate the advantages and disadvantages to ensure that it is the best choice for you. There are several apparent advantages to customer financing, as well as a few hidden dangers to be aware of. Let’s take a look at what’s going on here.
Client Financing’s Benefits
As previously stated, many studies have shown that providing financing to consumers benefits businesses in the long run. Let’s take a look at some of the most important advantages of client financing for small companies.
1. Sales Growth
Finally, as we mentioned, the goal of customer financing is to boost sales by converting more visitors into customers. Customers who would otherwise leave your shop empty-handed can now make a bigger purchase by providing a payment plan on your costly goods. As a result, encouraging consumers to make more purchases of higher-priced products will result in more income for your company.
2. You acquire clients
If you provide client financing, you should be able to increase sales while also attracting consumers who might not have come to you otherwise. To clarify, if your target client is in the market for a big purchase, such as a couch or a refrigerator, they may be more inclined to purchase from you rather than a rival that does not provide financing. Furthermore, since they already know they’ll be accepted for your payment plan, the same client may be more inclined to return to your shop for future costly goods, resulting in increased customer retention.
3. Payments in Advance
If you’re dealing with a third-party consumer financing business, they’ll pay you for the whole cost of the item up front and then collect incremental payments from the client. This is a significant advantage since it not only reduces your risk, but it also improves your immediate cash flow, making it simpler to invest in other aspects of your company. In this manner, you’re providing a useful and helpful service to your client while also boosting your company’s cash flow, since financed transactions are treated the same as any other purchase made in full up front.
Customer Financing has a few drawbacks.
Despite these advantages, client financing may not be appropriate for every small company, particularly if you don’t use a third-party supplier. As a result, while contemplating how to provide finance to your clients, keep the following disadvantages in mind:
1. Bad Debts Possibility
Even if you conduct a comprehensive credit check on a client before financing them—which is definitely a recommended practice—you may never really know how responsible they are with their money or what sort of financial roadblocks they may face that would prevent them from fulfilling their loan arrangement. The reality is that a client may go into arrears on their payments at any time, leaving you out of pocket. You must be prepared to take a chance.
Furthermore, even if you use a third-party provider, most merchant contracts stipulate that the merchant has the right to cancel the relationship at any moment. A provider may terminate your account if you have a high number of chargebacks or customer service issues.
2. Accounts Receivables (additional)
You may save money by not employing an outside firm if you decide to provide client financing yourself, but you must factor in the expense of growing your accounts receivable department. Taking up client financing on your own will result in additional costs, whether you need to recruit another staff or spend your own time monitoring and following up on financing payments.
3. Cash Flow Consequences
Again, if you don’t engage with a third-party source to provide financing to your clients and instead do it on your own, your cash flow will suffer, at least in the beginning. Customers will eventually pay you, but if keeping cash on hand is essential to your company, providing in-house client financing may not be the ideal choice.
Final Thoughts
It’s up to you to determine whether this financing model is appropriate for your company now that you know how to provide financing to consumers and some of the best choices for dealing with third-party suppliers. There are a few factors to consider while making this choice.
First and foremost, consider whether or not your consumers will benefit from this service. It may be worthwhile to provide client financing if you believe your consumers will want to utilize it and if a third-party supplier will qualify them to do so.
This being stated, you should attempt to assess demand in this service among your client base before joining up with a finance business (particularly one that costs you). You might conduct an email survey or speak with consumers who leave your shop without making a purchase. Customer financing may increase your business’s sales and customer happiness if it seems that customers would be interested in financing—and that it would encourage them to purchase something they otherwise wouldn’t.
Another thing to think about is what you’re selling. Customer financing has been shown to perform well for large-ticket goods such as furniture and appliances. Even if you’re selling more inexpensive items like clothing or modest home décor, a financing program—using a specialist provider like Afterpay, for example—might be beneficial. In reality, several millennial-targeted companies, such as ThirdLove, ColourPop, and Forever 21, have implemented consumer financing. Once again, think about how the product you’re selling may encourage or discourage customers from using customer financing.
Finally, you should think about the expense of providing this kind of funding. You should consider not just the actual per transaction cost of using a third-party supplier, but also any ancillary expenses, such as the time and money it will take to install the program, educate your staff, and maintain the process. If you’re considering using third-party suppliers to provide finance to your clients, bear in mind that the less costs a provider charges and the more setup and maintenance help they give, the better.
