Complete Guide on How to Offer Customer Financing
Customer financing is a great way to grow your small business. Especially for high ticket items, there are barriers to entry in a customer’s decision process on whether to purchase or not. By reducing the purchase price, through a payment plan, the merchant removes one large barrier to entry.
In this article, we go over customer financing, why merchants should include it as a payment option, and how to get started.
What is customer financing?
Customer financing is a financing program that allows payment for purchases to be spread out over time. The main benefit is that it reduces the initial purchase amount. This is done by splitting the purchase amount into multiple payments.
Customer financing is not a payment option that is automatically offered at the point of sale. Customers must be approved for financing based on their credit score. The merchant is taking on risks by foregoing the full payment. Risks mainly come in the form of the customer, at some point, not being able to meet their payments. To reduce this risk, the merchant will conduct a credit check as well as income and expense checks. This helps to paint a picture of the customer’s creditworthiness. From there, the merchant approves or declines the application. If approved, a payment plan and interest rate are determined.
If all goes according to plan, the merchant will receive a steady flow of income plus interest for some set period of time. The customer is even likely to continue doing business with the merchant. In this scenario, both the merchant and customer benefit.
3 reasons to offer customer financing
While there are many reasons to offer customer financing, we’ve chosen three of the most important. Each reason provides benefits for both the merchant and the customer.
1. Increase conversions
Financing allows customers to afford products and services upfront. For business owners, this means being able to retain more working capital. If the business had to pay for the product in full upon purchasing it, its working capital would be decreased by the amount of the product.
It’s a similar situation for consumers. Instead of working capital, they want to ensure an always present cash cushion. When a purchase can be spread out over time (i.e., monthly payments), it allows consumers to retain their cash cushion.
2. Increase average order size
With consumer financing, you can showcase a lower unit price for purchasing a larger volume. On top of offering to finance, the addition of a discount basically doubles the attractiveness of making the purchase. Couple these two factors together and you should see an increase in average order size from your customers.
3. Boost customer satisfaction
Payment plans give potential customers more options. When a customer knows they do not have to pay for a product in full, it relieves some stress and makes the purchasing decision a little simpler. The consumer doesn’t have to figure out how paying for the product in full will impact their immediate and short-term finances. They know that they have an affordable monthly payment. This makes it much easier to pull the trigger on the purchase.
How to offer financing to your online shoppers in 5 steps
There are five general steps to offering financing to your customers. Below, we list them from start to finish.
Step 1: Get set up with a financing service
A financing service will handle the payment plan and schedule. In other words, once the financing service is set up, it will handle all of the work. You don’t have to worry about processing payments, approving customers, creating a payment plan, or setting interest rates. It’s a set-it-and-forget-it solution.
Step 2: Make it clear that you offer financing
Financing is only useful if customers know it’s an option, so be sure to get the word out. Your financing company isn’t a marketing company. They focus on providing financing options to your customers. It’s up to you to ensure your customers know that different payment options are available.
There are a few simple ways to inform customers that financing is available. For website payments, place your financing option right at the checkout. This way, customers can choose to pay by credit card or through a payment plan. It will become just another choice for paying.
If your business has a physical retail establishment, advertise your financing options along with the credit card logos that you accept and any other forms of payment, such as checks. When customers go to pay for an item, they’ll see that financing is available. Additionally, since you are in physical contact with the customer, it doesn’t hurt to mention that financing is available, especially if a higher-ticket item is purchased.
Step 3: The customer applies for financing
As part of the financing application process provide a form that the customer can fill out to apply for a payment plan with the financing provider. This isn’t something you’ll have to create unless you are doing an in-house payment plan. The third-party financing company will provide a form to you. You should also be able to customize it to your needs. The application form is what’s used to determine if a customer is low risk enough for a payment plan. If the customer is approved, their credit limit and interest rate are determined from their creditworthiness.
Step 4: The financing firm develops a payment plan
If approved, the financing firm will develop an affordable payment plan with the customer, based on their credit risk profile. The customer’s revenues/income and expenses are factored in as well. The monthly payment note shouldn’t be so high that it puts the customer’s finances into jeopardy. That wouldn’t benefit anyone. But the monthly payment also shouldn’t be so low that it puts the merchant in a bind.
If you are using an automated payment process, maybe one that is integrated into your website’s check out system, it will determine the customer’s payment plan. Rather than a live person being involved, the payment system’s algorithm will crunch all the necessary numbers and provide a practical payment plan.
Step 5: You receive payments from the customer financing company
The customer will pay the financing company, and then you’ll get paid. It’s as simple as that. Basically, at this point, you have a bond that pays consistent interest each month. Meaning, your customer will provide monthly cash flow per their payment plan.
Want to learn about B2B financing?
We have some great resources available to you if you're looking to provide B2B financing like net 30/60/90 day terms. We can help you navigate difficult questions around trade references that often times confuses small businesses when it comes to offering B2B financing.