What is customer financing and why you should offer it
For many small businesses, a lot of their customers pay by credit card, cash, and less often by check. There are some small businesses that don’t accept credit cards because of the fees and potential for chargebacks.
Not accepting payment on credit shuts the door on a large pool of potential customers and sales. Rather than not accepting credit cards, providing credit through customer financing or offering net terms as a payment option can help to fill the credit gap. In this article, we’ll see how both net terms and customer financing works and why you should consider it.
Financing for business customers: Net 30 or Net 60 terms
If you’re selling b2b, customer financing can look quite different than when selling to consumers. In many industries offering net terms as a payment option is simply expected by business customers. This means your customer gets 30 or 60 days to pay their invoice. You’re essentially extending these customers a short-term credit line and ‘floating’ the risk of non-payment. Managing net terms places a lot of work on your accounts receivable teams, they need to run business credit checks, decide on a total line of credit, process payments, send reminders, and chase up late payments. There’s a great option for net terms and credit management called Resolve Pay. They look after every aspect of AR, and make your net terms risk-free with their non-recourse financing.
Consumer vs. small business customer financing
How does consumer customer financing differ from b2b? Big box retailers such as Best Buy, Target, and JCPenny have branded store cards. A store card is credit offered by the retailer. These store cards are white-label cards. Meaning there is a financing company behind the card. The stores utilize the financing lender but make it appear as though it is the store providing financing. Some of the reasons are branding and customer loyalty.
Smaller businesses generally do not have a branded store card. They still provide credit to customers by allowing them to pay with their own credit card. Some small businesses do set up in-house credit without using a card. It's still a store credit, but usually, all the customer receives is an account number.
It’s quite a bit of work for a small business to offer that type of in-house credit since they have to build their own financing platform. A better financing service option is to outsource it to a third party like Resolve Pay.
How does customer financing work?
Customer financing is a service provided by a third party. When a customer pays at the checkout, they have the option to pay on credit. The customer can apply at the point of sale and receive a quick credit decision. The process is automated so that the business owner doesn’t have to be involved with the application process. The third-party financing program will check the customer’s credit score and overall creditworthiness to determine how much credit to give the customer.
Customers make monthly payments based on their payment plans. Some payment plans don't charge any fees, while others have set interest rates. Depending on the small business owner, customers may have different payment options. Some plans may provide six months of credit while others provide 12.
Small business owners will offer a financing solution based on customer demand and need. Once the customer's bill is paid off, they are done. There aren't any long-term contracts involved.
Offloading the credit application process, payment collections, and back-office work frees up the business owner to focus on running the business. The owner is not a financing company and shouldn’t have to spend much time on customer financing. It's a win-win solution.
Disadvantages of in-house customer financing
In-house financing can work well for larger companies that have the resources to maintain it. For smaller businesses, in-house financing will be a drain on resources. This includes labor to maintain accounts receivable, software, and potentially hiring a collection agency. There are a few other reasons to consider avoiding in-house financing.
Some customers will inevitably end up not paying on their account. This leads to bad debts. A bad debt is basically money that the company can’t recoup. In other words, the balance on a bad debt account becomes a write-off or total loss.
When paying on credit, customers don’t pay immediately. Instead, they pay at some later date. The gap between purchasing a product and the first payment can create a cash flow shortage for the business. For example, vendor payments are due in 15 days, but customer payments aren’t going to arrive until 30 days (i.e., net 30) after the purchase.
Customer financing program benefits
Offering customer financing has many benefits. Here are just a few.
Increase order size by 15% on average. Larger orders mean more revenue. If costs remain stable, the additional revenue drops straight to the bottom line.
Buy now, pay later. What customer doesn’t like the idea of kicking the can down the road when it comes to paying for a purchase. Not having to layout a credit card can make a big difference when a customer is deciding to move forward with the purchase or not. Additionally, the business owner can increase sales by offering buy now, pay later. Net terms as a payment option is the most common form of this for business customers.
Don’t give customers the chance to leave so they can “think about it.” Break up a large sale into smaller payments with instant approval. You still get paid immediately. The financing provider is the one that must wait for payments.
Receive your payments upfront. If you were doing in-house financing, you’d have to wait until payments arrived. By choosing a customer financing solution through a third party, you’re paid immediately.
Allowing customers to pay on credit helps build customer loyalty. Not all companies offer credit payments. Those that do will have an edge over their competition. Customers see the flexibility in your payment options and know where to go if they want to pay on credit or get net terms.
5.) Outsource a labor-intensive process. In-house financing cost money and time. For smaller businesses, it is extremely resource-intensive. When you outsource to a third-party financing company, they handle credit checks, payment processing, and late payment collections.
Considerations before offering net terms financing
Check that there is an interest in customer financing options such as net terms payment options. However in some industries not offering net terms may be hurting your sales. Resolve has frequently seen a 30% lift in sales when our business customers offer customer financing in the form of net terms (30, 60, 90 day) payment options.
How Resolve can help
We're a complete B2B credit management and net terms solution. Resolve means your customers get net terms and you get paid faster. If you’re looking for a better way to manage the nightmare of customer credit checks, net terms risk, payments, and cash flow woes - Resolve is here to help. We believe your business shouldn’t act like a bank unless you’re actually a bank. Get paid by Resolve in a day, and we’ll let your customers pay us in 30, 60, or 90 days. However your customers buy from you, e-commerce or offline, we've got you covered.
If you are ready to offer net terms as a payment option, Resolve Pay is the best option.