If you’re not already offering additional ways for customers to finance their purchase, you’re definitely behind the curve. The Buy Now, Pay Later model has swept the business world by storm, inspiring more and more companies to hop on board. So, to help you stay competitive in your industry, here’s a look at how customer financing can work for your company.
What Is Customer Financing?
Customer financing is a credit arrangement that allows your clients to pay for their purchases over time. As a business owner, you can set up the financing in-house using your own funds or go through a third-party vendor. Either way, customers must meet the financing terms to qualify, such as minimum credit scores and spending requirements.
The payment plans often come up during the checkout process, helping remove a key barrier in completing the purchase. Point-of-sale loans help boost conversion rates by at least 20% as a result and even increase order totals up to 50%. On the downside, in-house financing can tie up working capital while using third-party vendors often results in additional fees.
Common Types of Financing for Customers
If you want to go this route, you have three main types of customer financing to consider:
Also known as primary financing, in-house customer financing turns your business into the lender. You have to fund the credit program while keeping your business afloat until payments come in. You’re also tasked with creating the lending terms, collecting payments, and dealing with loan defaults. Although it’s much more involved than using a third-party vendor, financing purchases in-house reduces additional fees.
A tried-and-true method of customer financing, layaway allows your customers to fund their purchases over time. The difference is that they cannot take their item until all payments land in your hands. Although this eliminates the risk of loan default, you still need to take the item out of inventory, potentially tying up your funds. Once the customer completes their payment plan, they just have to come by to pick up their order, which finalizes the purchase process.
With third-party financing, you essentially hire a lending company to provide point-of-sale loans to your customers. Through that arrangement, you receive full payment for each order while your customer enjoys the ability to pay off their purchase over time. The third-party vendor handles all the lending terms and requirements plus collects the monthly payments. You’ll need to pay the financing provider for their trouble, taking a chunk out of each purchase put on credit.
There’s no one right way to set up customer financing. You must reflect on your ability to float the purchases, hold back inventory, and pay additional financing fees to decide if any of the above options will work for you.
How the Benefits of Consumer Financing Work
When businesses decide to offer financing options to their customers, they can benefit in the following ways.
Remove Purchase Barriers
As your customers move through the buyer’s journey, the ability to finance their purchase can help remove barriers to completing the sale. The total sales price of each order tends to increase as a result along with your overall conversion rates.
Build Brand Loyalty
By offering customer financing, you act as a key resource in helping your clients solve their pain points. Their brand loyalty will increase as a result, resulting in them coming back for repeat purchases and leaving excellent reviews.
Attract New Customers
All the buzz about your brand will help bring new customers your way. They’ll be more likely to choose your company over the competitors, too, especially if you’re the only one offering customer financing options.
As this becomes even more widespread, failing to offer this option may result in your brand getting left in the dust. So, it’s important to start exploring now, letting you stay ahead of the other companies in your industry.
Ready to Start Offering Customer Financing?
In the current market, nearly 60% of point-of-sale loans are directly financed by the merchant. To do that effectively, you must be able to wait for payment from current sales while still replenishing your inventory.
While that’s not an easy feat, for sure, it can be made easier with assistance from a venture-focused financial services firm, like 5th Line Capital. By securing the right funding, you can add customer financing to your business toolset, positioning your company for future growth.
To get started in exploring your funding options, simply reach out to our team today. As your premier partners for growth, we can help you create your roadmap to success so you can secure the funds you need to move forward with your plans. So, please feel free to contact us whenever you’d like to talk about our creative financial solutions.