If you operate a small business, the financial resources of your clients may eventually play a role in your company’s success. This is especially true if you sell more expensive goods or services. So, how can you encourage consumers to check out and make a purchase without lowering your costs and jeopardizing your bottom line?
Customer financing for small business is one such method. Customer financing, often known as consumer finance, is a buy-now-pay-later technique. You can either provide funding in-house or hire a third-party financing provider. Customer financing may be a win-win situation for both customers and business owners: customers receive what they want, and you complete sales on full-priced items and services.
Because COVID-19 affects how people purchase, businesses with online storefronts and e-commerce enterprises may want to explore implementing a financing platform, which may boost customer loyalty and sales.
Continue reading for a thorough overview of business financing for customers, to investigate your consumer financing alternatives, and to learn about the pros and downsides of each.
Different Types of Consumer Financing
Third-party financing is a kind of financing in which a small business owner relies on a third-party finance provider to act as a lender at the point of sale. In most of these schemes, the consumer joins into a payment plan to pay off the full price of a purchase over time, usually through monthly installments.
Primary financing is when a company serves as a lender and offers its financing program to clients. For the business, primary financing is often a more extensive procedure than third-party financing.
How to Provide Customer Financing
To provide consumer financing for merchants, follow these steps:
- Examine your consumer financing choices and choose which to provide.
- Inform your consumers about their financing choices.
- Accept and assess client financing applications: If you provide in-house financing, you must employ an evaluation method to establish a customer’s creditworthiness. If you want to cooperate with a third-party consumer finance firm, the company will handle the approval or rejection of customers.
- Complete the transaction.
- Collect payments from customers per the payment plan arrangement.
Small Business Consumer Financing Possibilities
Layaway is a payment plan in which a company reserves a product for a client and holds it until the buyer pays for it, generally in a series of partial payments. In contrast to other types of finance, a layaway arrangement does not allow the consumer to obtain the goods until it is fully paid for.
Third-party Consumer Credit
Third-party consumer financing for businesses has lately gained in popularity among all sorts of businesses, notably internet shops.
If you sell higher-priced goods or services, in-house financing may be a suitable fit for your company. Electronics, appliances, furniture, and house upgrades and repairs are some examples of items and services that clients may desire to finance.
The Benefits and Drawbacks of Providing Consumer Finance
Small company operators should weigh the advantages and disadvantages of providing consumer financing for small businesses. We’ve outlined some of the benefits and drawbacks below.
Consumer Financing Advantages
- Increase your sales: When consumers are contemplating whether to make a purchase, the initial upfront cost and sticker shock can be significant barriers to overcome. Customers may be able to afford lower payments if the cost of a product or service can be divided into monthly installments. “Buy now, pay later” is an excellent strategy for increasing sales of both high-ticket products and huge order amounts of less-priced things.
- Reduce annoyance: If you choose to work with a third-party finance source, you won’t have to deal with account management or nonpayment difficulties. Instead, you may concentrate on the expansion of your business and count on a more steady cash flow.
- Boost order values: When firms provide consumer financing, order size rises by 15% on average. As a result, larger orders result in more income, which helps your bottom line. Furthermore, the buyer gets to get precisely what they want rather than an alternative that may or may not be exactly what they need.
Customer Financing Disadvantages
- Customer acquisition costs: Although financing is a terrific method to attract new clients, the cost may not be worth it. After a few months of employing consumer financing, you should evaluate the return on investment to guarantee it’s a solid idea for your firm.
- Minimums: Before you may provide financing to clients during the checkout process, some lenders need a particular transaction amount.
- Charges and expenditures: You will almost certainly have to pay costs if you choose a third-party finance source. Some companies offer a set monthly cost, while others charge a percentage of each transaction. Offering in-house finance may necessitate expenditures in both personnel and software.
What is the Cost of Customer Financing?
The cost of incorporating customer financing programs for small business into your company strategy is determined by the financing solution you use.
You will incur charges for doing credit checks and collecting consumer payments if you employ in-house financing. You’ll also require workers to perform and finish those administrative jobs, which will increase your expenditures.
You will be charged a fee to use third-party financing services. The cost might be in the form of a percentage of every transaction procedure or a monthly fixed price.
Should You Provide Consumer Financing?
At the end of the day, the choice between a small business offering financing to customers or financing solutions to your consumers is entirely up to you. Whether you choose point-of-sale financing from firms like Affirm or Klarna, or you provide financing in-house, these financing options can result in increased sales.