When businesses offer customer financing, they can finalize more deals, win larger contracts, and complete larger average transaction sizes. What does offering financing for your customers mean? Well, the short answer is that: it’s when a company offers customers to pay a large amount in installments rather than the entire amount upfront for a pricey good or service.
So, your consumers will have more purchasing power if you provide them with customer financing programs that will also draw in new clients and encourage repeat business.
Now, these financing options don’t have to be fully funded by the business itself. Third-party financing companies can also help customers pay, but the catch is customers will have to repay them in installments by setting up a plan.
Let’s see how these programs work, and what you can do to bring customer financing to the forefront seamlessly.
Understanding Customer Financing: Here’s What You Need to Know
Many consumers will allow up-front expenses to deter them from purchasing a good or service.
When financial services are offered in the form of consumer finance, people can get the money they need for various purchases right away.
Although the term “consumer financing” might not be familiar to you at first, the foundation of this system is the same as that of conventional banking and other loan services.
In short, businesses can lower their customers’ short-term costs by enabling them to conveniently split their bills into many installments using customer financing programs.
To see how consumers look at consumer finance, let’s look at a poll from Klarna with around 250 retail decision-makers and 2,000 US customers. The survey revealed that 27% of consumers stated that having flexible payment choices would make them more likely to spend money with a firm, and 36% of consumers said that having flexible payment options would encourage them to make another purchase from the same brand.
So, these financing options for customers benefit both consumers and businesses because they give consumers more spending power and flexibility and they enable firms to boost sales while enhancing cash flow.
Types of Customer Financing Options
Depending on your business needs, there are some types of consumer financing for businesses you should be aware of:
In-House Financing
You are solely accountable for the program when you provide customers with in-house retail finance. An accounting software to monitor accounts receivable and collections, personnel training, and administrative costs will all be incurred. If clients fail to pay, it will cause delays and jeopardize your cash flow.
Additionally, you must create a credit policy for your company and set up an accounts receivable management system. Remember that with automated payment reminders and invoices, accounting software may streamline the payment process and free up time for you to concentrate on running your company.
Third-party Financing
When using third-party financing companies, your business depends on that supplier to function as a lender at the point of sale. These companies allow customers to finance their purchases. Under most of these schemes, the customer then agrees to a payment plan that allows them to pay the entire amount over time, usually in installments of one month.
Another advantage of using third-party lenders is that they offer unsecured loans, so the purchasing rate is higher, which boosts the business’s revenue.
To provide pre-qualified loan offers, third-party financing companies typically have a network of several lending partners. This implies that when your customers apply for financing, they may compare interest rates and monthly payments, choose the best choice, and receive more attractive offers from reliable lenders.
Assessing Your Company’s Needs For Offering Consumer Financing
It’s essential to determine the reasons for getting small business customer financing options before actually offering it. Are you trying to grow your clientele, boost sales, or both? It can be easier to choose the kind and structure of funding options to offer if you are aware of your company’s aims and objectives.
To begin providing credit to customers, it’s also crucial to first decide what kind of consumer finance programs to offer such as in-house and third-party financing.
You should also remember that there’s a price associated with offering customer financing.
The expenses involved in running credit checks and collecting payments from customers for in-house financing will fall under your purview. Moreover, you’d need manpower to handle and complete those administrative tasks, which would increase your costs.
If you’re thinking, “Should I be using third-party financing for my customers?”, remember that it’s also subject to a cost. The fee could be a fixed monthly amount or a portion of the processing charge for each transaction.
Researching Potential Providers for Best Customer Financing
Examine the many funding options available and choose which ones are the best customer financing for small business.
Look for respectable lenders with expertise in the industry in which they provide their services. You can even ask for recommendations or see reviews from similar businesses that offer customer financing.
Think about criteria like interest rates, costs, terms of repayment, and customer service. Keep in mind- selecting financing for your customers with affordable prices, adaptable terms, and top-notch customer support is essential. You should also take into account variables including credit standards, approval procedures, limit loan terms, and minimum loan amounts.
Evaluating Financing Options Suited for Your Customers
Not all consumer finance providers offer the same type of services, each financing option has its pros and cons depending on your needs.
Line of Credit
A line of credit, in contrast to a standard loan, does not require the customer to use the entire amount at once. Rather, they’ll only pay interest on the amount you withdraw and can take out as much as their credit limit.
However, the customers need to keep their credit score in good standing, this way they can put themselves in a position to receive better loan conditions in the future. Most first-time applicants are advised to open a modest credit line and pay it off fast.
If you’re thinking of business financing for customers with a line of credit, let’s look at the pros and cons you should consider:
Pros
- They can borrow money whenever you require. There’s no specific limit to how many times they can access the funds.
- The interest is only applicable to pay for the amount of funds they borrow. There’s no extra charge.
Cons
- Since line of credit interest rates are typically variable, they may fluctuate in parallel with changes in general interest rates. Because of this, it may be challenging to estimate the total cost of the money they might borrow.
- Due to their lack of collateral requirements, lines of credit are frequently more expensive than other loan categories like mortgages and vehicle loans.
Loans
Businesses can help customers apply for loans from credit unions, banks, and online lenders.
The borrowed money is made accessible as a line of credit or as a lump sum payment. After that, customers have to pay back their lender by the loan terms, which specify the length of the repayment period and the interest rate.
There are quite a few different types of loans you can apply for as a customer. But, if you’re thinking of getting a good lump sum, keep in mind that your customer should have the ability to build a positive credit score over time.
Pros
- Compared to other financing options for customers, they can avail of lower interest rates and choose their payback terms according to their capability.
- It’s easier for customers with assets to get the loan, as it can be used as collateral.
Cons
- If they’re using anything as collateral, there’s always a risk of losing the asset if they’re not able to pay back the loan.
- They can’t miss any payments, otherwise the debt can add up which may also lead to penalties.
Leasing
Customers can acquire the goods/services they require without having to buy them outright thanks to lease financing. In essence, this type of financing allows consumers to pay a monthly or quarterly charge for the use of assets like cars, machinery etc that they want to rent for a specific amount of time.
The customer has three options when the lease expires: they can buy the item outright, extend the lease, or return the asset.
Pros
- With lease financing, customers can obtain the assets they require without needing to make a sizable payment upfront. This might be especially helpful for those who need to conserve cash flow.
- It offers more freedom to clients because they can choose to return the equipment after the lease agreement if it is no longer essential.
Cons
- Over time, lease payments may exceed loan payments as customers are merely paying for using the asset rather than purchasing it entirely.
- Customers who depend on leased assets can encounter challenges in securing more funding down the road since the leased assets might not be deemed collateral.
Regardless of the funding options you choose, it’s important to consider which would benefit your consumers the most. It’s advised that you consult with a reputable provider to make an informed decision, as they can assist you in selecting the best course of action that fits your company’s objectives.
Understanding Terms and Conditions for Financing Agreements
When businesses are looking to provide financing options for customers, they should look at the interest rate, repayment schedule, prepayment penalties, late payment fees, and any other costs related to the loan.
A rise in the interest rate or demand to produce collateral are two further clauses to watch out for that could have an impact on your customer’s ability to repay the loan.
You should do some research and contrast offers from several lenders. It’s important to understand the terms of the agreement once you’ve selected a lender you want to work with so that it benefits both you and your customers.
Making the Final Decision: Things to Consider
Selecting the best provider for your business needs might be challenging with so many options available. We’ve finalized a list of important considerations to keep in mind when choosing the best customer financing for small business.
- Identify providers who have successfully supported companies just like yours in the past. Most reputable companies have raving reviews from happy customers, which attests to their dependability and professionalism.
- Depending on the source of your consumer finance programs, you should evaluate the costs associated with various financing companies. Generally speaking, alternative or online lenders have lower interest rates than traditional banks. But they frequently charge higher costs.
- Carefully consider the conditions and interest rates provided by possible finance providers before signing any paperwork. Making sure that all expenses, charges, and terms of repayment are spelled out upfront is crucial in this situation.
- Selecting a finance provider that you are personally acquainted with may prove beneficial. This way, you can get the best terms for your small business and forge a solid partnership.
- Having a good customer support team is also essential, especially for third-party financing companies. They have to make customers understand about the procedures and advantages of their customer financing programs. So, it’s important to have knowledgeable staff members to guide clients through the decision-making process.
Overall, what you should think about the most is whether the financing options for customers are worth it. Otherwise, it could cause your client base to reduce their purchases.
Offering Customer Financing: Sealing the Deal
You can improve sales, draw in new clients, and build client loyalty by providing offering customer financing choices to your clients. The process can be made easier for you and your clients by collaborating with top finance program providers.
Through extensive research and comparison of various financing options for customers, businesses can successfully launch a client financing program. You should partner with independent consumer finance companies who have a focus on lending to consumers and have knowledge of your sector or business.
Remember that the financing provider you choose supports your company’s core principles and provides conditions that are both competitive and beneficial to your clients.
