What Factors Should Be Considered When Offering Consumer Financing to Small Businesses?

Customers can use consumer financing to purchase products or services and set up a payment plan. The business owners are paid in full upfront, just like with a credit card. The goods are delivered straight away, but the consumer must pay over time. The merchant may be required to pay a modest fee for each funded transaction, and the client is usually charged a fixed rate, interest,  on the financing.

A firm may provide a customer financing program or service to assist customers in paying for items, services, or goods over time. Typically, financing entails an application procedure in which a credit check is used to determine the customer’s total credit risk.

The finance firm pays your business in full upfront for the service or product. Then, on a payment plan, your consumer repays the finance firm in installments. That implies a buyer on a tight budget won’t have to wait long to get their hands on your newest products and special offers.

There are two types of customer financing that can be offered by small businesses:

1. Primary Financing: When a business serves as a moneylender and offers its own lending program to consumers, this is known as business-to-business financing, commonly referred to as Primary Financing. Primary financing is a more time-consuming procedure for the company than third-party funding.

2. Third-party Financing: When a small company owner relies on a third-party finance source to act like a moneylender at the point of sale, this is referred to as point-of-sale financing. In most of these schemes, the buyer agrees to a defined payment plan that allows them to pay for a product in full over time, frequently in monthly installments.

In comparison to other, more stringent kinds of financing, third-party financing businesses allow for a wider variety of credit to be accepted. These financing options may be interest-free in some situations, while others may charge interest at a defined rate.

Consumer Financing for Your Business

Consumer financing might seem a plausible option to scale your small business, and attract new customers, but it is necessary to find out if your business needs customer financing or not.

If your small business offers products or services that are of high value, customer financing can be used.

Consumers tend to hesitate in buying high-value products, if various financing options are available, the consumer might actually buy the product instead of just adding it to the cart. If your normal consumer is unwilling or unable to purchase your goods without a payment plan due to cost, you might want to consider offering consumer financing.

Advantages of Offering Consumer Financing

1.   Increased Sales using Consumer Financing

It is not an unknown fact that when the business owner adds various consumer financing at their checkout, the sales are likely to increase.

Consumers are in a dilemma when they are not able to afford the product but want to buy the same. Consumer financing options allow them to buy the products instantly without paying the whole price. Different financing options allow the consumers to select a plan and pay accordingly later on

By providing a payment plan for your more expensive products, you’re allowing clients who may otherwise leave your business empty-handed to finish a larger purchase. As a result, encouraging consumers to complete more transactions of higher-priced goods can increase income for your company.

 2.   Improved Flow of Payment Using Consumer Financing

When your small business enterprise employs Consumer financing, you won’t have to worry about maintaining accounts or nonpayment difficulties if you choose to deal with a third-party finance provider. Instead, you may concentrate on the development of your firm and count on a more steady cash flow.

3.   Increased Order Values Using Consumer Financing

When a company offers consumer financing, the average order value size increases significantly. As a result, greater orders result in more money, which helps to enhance your bottom line.

Furthermore, the buyer has the choice of purchasing exactly what they want rather than an option that they have to choose because of their inability to afford the product.

Disadvantages of Consumer Financing

1.   Additional Fee using Consumer Financing

The majority of consumer financing solutions, particularly those that manage the procedure for you, third-party moneylending services, are not free. Some service providers offer a set monthly cost, while other services charge a percentage of each successful transaction.

You will need to figure out which model is appropriate for your small business, as well as how much money it can afford.

2.   Minimum Order Requirement Using Consumer Financing

To utilize some providers, you must reach a specific transaction threshold, or you may be charged a fee. Inquire with your potential consumer finance partner to see whether this is a requirement for using their consumer financing services.

3.   Bad Debt Using Consumer Financing

You can not tell whether a consumer will default on payments even if you do a credit check. Even if you have impeccable credentials, it is conceivable that a customer would not pay. Even if you receive money in advance, if your business attracts too many consumers who break their agreements, a supplier may decide to abandon your business.

Furthermore, even when you use a third-party lender, contracts of most merchants indicate that the merchant has the right to terminate the arrangement at any moment. A provider may deactivate your account if you have a high number of chargebacks or customer service issues.

4.   Rise in Customer Acquisition Cost Using Consumer Financing

While consumer financing alternatives might help you attract new customers, the cost of attracting that new client might not be worth it. It is advisable to evaluate your chosen tool after a few months of use so you can thoroughly review the data and determine whether your costs of sale have increased.

Steps for Offering Consumer Financing

●   Examine your consumer financing alternatives and select the one you want to offer.

●    Make sure your consumers are aware of their financing choices.

●     Accept and evaluate consumer financing requests: You will need to employ an evaluation technique to determine a customer’s creditworthiness if you are supplying in-house financing. If your enterprise chooses to work with a third-party customer financing company, the company will approve or reject customers on your behalf.

●    Complete the transaction.

●    Collect payments from customers in accordance with the payment plan arrangement.

Providers of Consumer Financing

Although there are hundreds of companies that may assist businesses in offering consumer financing, not all of the financing options are appropriate for small enterprises. Many of these companies impose monthly sales minimums or a specific amount of financed purchases, and they take a hefty percentage of financed transactions.

As a result, if your business decides to offer to finance to your consumers, you will want to be sure you pick the correct source.

ViaBill, AfterPay, Affirm, PayPal, LendPro are some of the many popular options available that offer consumer financing to small business owners.

In the End

It should be simple for you, the merchant, to set up a consumer financing option. Furthermore, your consumers should be able to apply for consumer financing and enroll in a payment plan with ease. Avoid programs that need you to incorporate expensive or sophisticated equipment into your current payment infrastructure or that demand your clients to complete long documentation.

It is ultimately up to you whether your small business wants to offer your consumers a financing program or a variety of financing solutions. Whether you utilize Affirm or AfterPay for point of sale financing or provide in-house financing, these finance alternatives can help you increase sales.

Author Bio:

Aline Huseby is a Sales & Marketing Manager at ChargeAfter. She would like to share content on Finance Industry like Point of Sales financing, Buy now Pay later, consumer financing & Ecommerce financing for valuable reader.