As a business owner, maximizing sales is always a top priority. Businesses have found that offering financing to customers has made it easier for them to reach this goal. A recent study shows that the average size of purchase increased by 15% when companies offered financing to customers at the point-of-purchase.
Continue reading to learn how to offer financing to your customers and what to consider before doing so.
What is Customer Financing?
Customer financing is when a business offers financing as a payment option to their customers, either on behalf of the business itself or through a third-party financing company. Rather than a customer paying for the total cost of their purchase at the point-of-purchase, customer financing options allow the customer to pay for their items in a series of affordable installments, plus an interest rate based on the total financed amount. So, if a customer chooses to finance their payment, they will be able to take their purchase home immediately while paying for the total cost over a longer period of time.
How to Offer Customer Financing
There are two ways that your business can offer financing to customers:
- 1. Through an in-house financing service run by your company.
- 2. Through a third-party financing service such as Currency
Although the customer’s experience is relatively similar through both methods, the major difference is the amount of time and resources needed within your business. If you choose to offer financing to customers through an in-house service, you are taking on the risk of financing a customer directly, management of the payment collection, as well as reducing initial revenue earned for that purchase. In comparison, if your business chooses to use a third-party financing service, they would manage the vetting, approval, and payment collections. You would also receive the full amount of the financed item in your merchant account, typically within one week after the customer makes the purchase. Your business would primarily be responsible for selecting which third-party service to integrate into your sales and checkout experience.
When offering customers financing, the customer experience should be relatively straightforward:
- 1. A consumer (at either a brick and mortar location or an eCommerce check-out) tells the cashier or selects an option during checkout stating that they would like to finance their purchase.
- 2. The customer is given a short questionnaire that assesses their credit and the credit risk that financing the customer presents to the business.
- 3. If approved, the business will receive the funds for the item within seven days (if the financing is through a third-party service) or over a period of time (if the financing is in-house).
- 4. The customer will receive the goods or services they purchased immediately and will be responsible for paying off the item over a period of time in installments, plus an interest rate based on the total financed amount.
Things to Consider
Before you decide to offer financing to customers, you should carefully consider and be aware of a few elements involved in the process.
- – If you offer customer financing through an in-house service, you will need to be aware of the risk that your business takes on each time a customer applies/is approved for financing. Although you should only be approving customers who have a track record and credit history that proves they are capable of and are more likely to pay you back, there is always the risk that the customer defaults on their payments and your business never receives the money for the item the customer purchased.
- – If you offer customer financing through a third-party service, you should be aware of the cost of doing business with the third-party financer. Some third-party financing services charge a monthly rate. Others take a percentage out of the total price or each installment the consumer pays. You will want to be aware of these costs when deciding if it would be beneficial for your business to offer financing to customers.
- – Some third-party services have a minimum purchase threshold before customers can use their financing options (i.e., $1,000 minimum purchase), so you should be aware if a minimum exists.
If your company sells big-ticket items like furniture, equipment, appliances, etc. offering customer financing may be more beneficial for your business. Due to the higher price tag of these types of items, some customers may need help completing their purchase. Customer financing would increase their purchasing power, leading to more sales. A study conducted by comScore Research found that 25% of customers who used a financing option said they would not have made the purchase at all if they didn’t have a financing option. If your business sells items with relatively low-price tags, however, it is less likely that customers will need financing options to complete their purchase.
Ultimately, offering financing to customers can be a win-win situation for both your business and your customers. While you can increase your average purchase size and sales volume, customers can purchase more of the products and services they need.