The Complete Guide To Customer Financing For Small Businesses

How does customer financing help small businesses? Consumer financing allows those who are wavering on a purchase because of the price to buy from your business right away and then pay for the goods/services in installments in the future. By offering these payment plan financing options, you don’t lose a sale to sticker shock.

How Do Customer Financing Programs Work?

Customer financing is any type of buy-now-pay-later arrangement. Typically, the customer will have to pay a portion of the total cost before the goods/services are released. This sort of financing is usually a business-to-customer (B2C) arrangement instead of a business-to-business (B2B) arrangement.

If you want to offer customer financing, you can either provide that service in-house or you can work with a third party.

In-House Customer Financing

With in-house customer financing, the merchant (you) takes all the financial risk — and possibly reaps all the financial rewards — associated with allowing customers to pay for products or services over time. Here’s what to consider before setting up an in-house financing program.

Third-Party Customer Financing

If you don’t want to take on the hassles of in-house financing, consider using third-party customer financing. There are companies specifically set up to do customer financing or just debt collection (if you continue to wish to keep a portion of the work yourself).

Some of these companies charge you nothing for sending a customer to them for financing. Others charge you a fee for sending a customer to them. Third-party companies will also keep the fees and interest the customer pays to obtain financing.

In return, the financing company takes care of all the legal and operational complications of customer financing for you.

Before working with a third-party financing company, make sure you understand the details of how the financing company works before signing a contract. It’s especially important to know your expected sales increase and expected profit. If you sell low-margin items, make sure that financing charges do not exceed your profit margin.

Is Consumer Financing A Good Fit For Small Businesses?

Many large businesses from car manufacturers to retail chain stores provide consumer financing. These are all large businesses that can afford a separate department — and sometimes even a separate corporate subsidiary — to take care of consumer financing.

While small businesses don’t have this luxury, third-party customer financing companies make it possible to offer consumer financing without putting additional tasks on your employees.

It’s a quick way to get started, and it introduces you to an industry that you can become more familiar with so you can potentially continue offering financing in the future, either through a third party or with an in-house program.

Here’s a breakdown of the benefits and drawbacks of offering third-party customer financing.

Pros & Cons Of Offering Third-Party Customer Financing

How To Offer Customer Financing: Online VS Brick-and-Mortar

If you have decided to offer financing to your customers, the way you tell your customers that financing is available and invite them to apply will depend on whether you operate a physical store or an online store — or both. It also depends on whether you’ve decided to do this in-house or through a third-party specialist.

If you’ve decided to offer financing in-house, you can advertise any way you want to, as long as you have the application readily available for an interested customer to sign up. However, if you’ve decided to go with a third-party provider, then there are several ways to deliver information about the financing offer and payment options.

How Much Does It Cost To Offer Customer Financing?

The cost to offer customer financing ranges from free to charges comparable to processing a credit card. In most cases, third-party companies do not disclose what the merchant is charged for customer financing. If this is the case, you will need to contact the company directly for more details.

It’s also important to think through other issues, such as how chargebacks and returns will be handled.

Types Of Customer Financing Programs For Small Businesses

There are three types of financing companies that offer third-party customer financing services: traditional financing companies, fintech companies, and hybrid groups.

• Traditional Financing Companies: With traditional financing companies, it may take a day or two to process and approve finance applications.
• Fintech Companies: These companies often do a soft credit pull and offer financing in seconds. These loans tend to be smaller and are usually repaid within a year.
• Hybrid Companies: These companies feature some characteristics of both the traditional and the fintech companies. They also do a soft credit pull and sometimes can offer you a loan for a very small amount very quickly. Typically, these companies also offer larger loans.

The unfortunate reality is that few third-party companies offer information upfront about sign-up costs, processing fees, and contract terms. Your best course of action will be to research the three types of companies, determine which types offer the right type of financing for your customers, and contact companies directly for more details.

It’s wroth noting that if you look at the way these companies work — especially fintech companies — there’s a strong potential they might replace the merchant processing side of the credit card industry. The credit approvals, loan amounts, and repayment terms are very similar to charge cards, where each charge is judged separately based on the borrower’s current debt loan and creditworthiness.

From a merchant’s standpoint, it may be a good idea to understand how these financing companies work in the event they replace some credit card company functions in the future.

Should I Offer Third-Party Financing For My Customers?

There are a lot of data-based arguments that suggest that making financing available to your customers translates to more sales. As a small business owner, the easiest way to do this is to go through a third-party financing company so that you won’t have to deal with the paperwork, the possible cash flow issues, the legal aspects of lending, and the defaults when a customer refuses to pay.

Questions To Ask Third-Party Company

If you decide that you’re interested in working with a third-party financing company, be sure to ask questions such as:

• Do you charge you for sending a customer to apply for financing?
• Do I get a finder’s fee for sending customers?
• How do you deal with merchandise returns? Will I be required to accept a return? Is money returned to the customer, or is that handled by the finance company?
• How do you deal with disputes and chargebacks? What about fraud?
• How do you deal with defaults?
• Who handles customer service? If this is divided, how is the responsibility shared?
• How quickly will I be funded, and at which point in the process does a sale count as a sale?

You might have more questions, so be sure to write them down before you contact a financing company.

Alternatives To Customer Financing

If you decide that offering customer financing is not a smart choice for your business, there are other ways to boost your capital to grow your business. This includes taking out a small business loan or line of credit, using invoice financing to sell or use your unpaid invoices as collateral for a loan, or applying for grants.

You may also want to consider things like offering new products or services, targeting new markets with an updated marketing campaign, or using additional sales channels to reach more customers.