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Customer Financing: Should You Offer It?

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

After starting your business, your next (and continuing) task is finding ways to keep it up and running. One way to do that? Adjusting your business to the needs, wants, and budgets of your customer base—a surefire way of keeping your sales up. And depending on the size and price of your inventory, offering customer financing might be a great way for you to increase sales and customer loyalty.

Customer financing allows your customers to enroll in an affordable payment plan, rather than paying the entire price of an expensive item upfront. It’s designed to convert people from simply looking and thinking about shopping in your store to actually buying your product.

There are two ways to go about offering customer financing: outsourcing to a third-party financing firm that collects customer payments for you; or signing up for a service or platform that enables customers to sign up for financing at the point of sale, so merchants can manage the process in-house.

We’re breaking down your customer financing options, how to choose which process best suits your business and preferences, and whether you should offer customer financing at all.

Customer Financing Companies vs. In-House Financing Platforms

As a small business owner, you’re used to maintaining control over most (if not all) of your processes, and your customer financing program may be no exception. In that case, consider a customer financing solution that allows your customers to apply directly at the point of sale—you can even help them complete these digital applications right from their smartphones.

On the other hand, sometimes it’s best to leave these things to the professionals. If you outsource your customer financing management to a third-party firm, you won’t be dealing with your customers’ payments directly—but you will free yourself of an additional task.    

Here’s more information on both customer financing options so that you can make the best decision for your business:

Third-Party Financing Companies: What They Are and What They Do

If you decide to work with a financing company, they’ll work with you to develop payment plans that make sense for your customers and your products.

These companies, like BFS Capital and First American Merchant, pay you the entire amount of the item upfront, and then collect the payments and interest directly from the customer. That seriously lessens the risk on your end and increases your immediate revenue. Plus, you won’t need to take on the onus of tracking down your customers’ payments—that’s the financing company’s responsibility.

Third-party financing companies all complete credit checks before approving your customers to ensure that they’re fiscally responsible. Often, companies offer different funding programs to align with your customers’ creditworthiness. These primary, secondary, and tertiary programs charge customers less or more in interest, depending on their credit scores.

When you’re deciding on which financing company to work with, have some knowledge of where your average customer’s credit score is, and find a company whose credit standards suit that range.

Also be sure to evaluate the cost of working with a financing company. Some companies may charge you a monthly fee to use their services, and others might take a percentage of the financed sale.

In-House Financing Platforms

Alternatively, you can sign up for a service that allows you to control the customer financing process in-house. If you opt for one of these digital platforms, your customer can apply for financing in your store, right from their smartphones, which speeds up the process and cuts out the middleman.

Here are three in-house customer financing platforms you might want to consider:  

1. Blispay

With Blispay, your customer applies for financing right from their phone. If they’re approved, they’ll receive a Blispay Visa card that they’ll use to pay down their purchase over time. So, if you already accept Visa, you won’t need to take any extra steps to start accepting Blispay—it’ll fit into your existing system. Blispay doesn’t charge merchants additional fees on top of their existing Visa integration, either.

2. FinanceIt

FinanceIt doesn’t charge merchants transaction fees, and the standard program is free, too. Like Blispay, your customer can apply for FinanceIt customer financing from their smartphone in your store, and, if approved, they can receive funds as soon as the next day. Then, FinanceIt transfers the total payment amount to you within two business days, and the company takes care of payments from there. They’ll charge your customers additional fees depending on their creditworthiness, region, and the size of the payment plan.

3. LendPro

Applying for financing in-store can feel overwhelming for some customers. And even if they are approved, they may need some time to check their budget, think it over, and come back with a decision. That’s where LendPro comes in handy.

This customer financing platform integrates to your small business website, so your customers can check their financing options from the comfort of their own homes. If they decide to pursue a payment plan, LendPro lets them evaluate multiple options through their application process. They provide payment plans for all levels of creditworthiness and payment amounts.

customer financing

Benefits and Drawbacks of Customer Financing

As always, when considering a new business model, you’re going to want to weigh the pros and cons to make sure it’s right for you. When it comes to customer financing, there are some obvious benefits, as well as a couple of hidden risks to prepare for.

Benefits

1. Increased Sales

As we mentioned, offering a payment plan on your expensive items makes it possible for customers who might have left without buying anything to complete a larger purchase. More sales for more expensive items? That spells more revenue for you.

2. You Gain Customers

If your target customer is in the market for a large purchase, like a sofa or a fridge, they might be more likely to buy from you than from a competitor that doesn’t offer financing. That customer might also be more likely to return to your store for future expensive items, since they already know that they’ll be approved for your payment plan.

3. Upfront Payments

If you’re working with an outside customer financing company, they’ll pay you upfront for the full price of the item and then collect incremental payments directly from the customer. Not only does that limit the risk for you, but it also increases your immediate cash flow, making it easier to take care of other things in your business.

Drawbacks of Customer Financing

1. Potential for Bad Debts

Even if you do a thorough credit check before financing a customer (which you should!) you can never truly know how responsible they are with their finances or what kind of financial roadblock they may run into that would preclude them from honoring their debt agreement. The truth is, there’s always the potential for a customer to become delinquent on their payments, which would mean that you’re out that money. You need to be willing to take that risk.

2. Extra Accounts Receivable

You may save money by not hiring an outside customer financing company—but you will have to calculate the cost of the size increase of your accounts receivable department. Even if that just means hiring another person to be responsible for tracking and following up on financing payments, employing that extra hand is an added expense.

3. Impact on Cash Flow

Without the upfront cash you’d receive from a customer financing company, offering financing on your own will have an adverse impact on your cash flow, at least at the beginning. Eventually you’ll start receiving those payments, but if having cash on hand is important to your business, this might not be the best option for you.

customer financing

Should You Offer Customer Financing?

Bottom line: You should only offer customer financing if your customers will really take advantage of a payment plan. Even before signing up with a financing company or digital solution (especially one that charges you), try to gauge interest with your customer base. Send out an email survey or talk to customers in your store who leave without purchasing anything. If it seems like people would be interested in financing—and it would incentivize them to buy an item that they otherwise wouldn’t—then customer financing could boost your business’s popularity.

Another thing to consider is what you’re actually selling. Customer financing works for big-ticket items, like furniture or appliances. If you’re selling products like clothes or smaller decor that are more affordable, a financing program just might not be necessary for you.

And if you do decide to offer customer financing, you’ll need to decide whether to arrange your financing in-house or outsource to a third-party financing company. Deciding how much you’re willing to spend, and how much extra work you’re willing to take on, will help make that choice a lot easier.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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