Customer financing lets customers enroll in a payment plan to buy goods or services. Similar to a credit card, the merchant receives full payment upfront. The customer receives the item right away, but pays over time. The customer is typically charged interest on the financing, and the merchant might have to pay a small fee for each financed transaction.
After starting a business, your next task is finding ways to acquire and retain customers. Of course, in order to do so effectively, you must adjust your business to the needs, wants, and budgets of your customer base. This being said, depending on the type and price of your inventory, offering customer financing might be a great way for you to increase sales and customer loyalty.
What is customer financing? Customer financing allows your customers to enroll in an affordable payment plan, rather than paying the entire price of an expensive item upfront. In this way, customer financing is designed to convert people from simply looking and thinking about shopping in your store to actually buying your product.
Small businesses and larger brands alike offer customer financing to convert more people from browsers into buyers. Therefore, if this sounds like something that might benefit your business, you may be wondering: How do I offer financing to my customers? We’re here to help. We’ll break down your customer financing options, how to choose a financing program that suits your business and preferences, and discuss whether you should offer financing to customers at all.
As we mentioned, customer financing offers options for customers who want to buy your goods and services, but can’t pay the entire price upfront. By enrolling in a payment plan, an item that costs, for example, $500, becomes available to your customer for five payments of $100 (plus a small interest rate). Essentially, by offering financing to your customers, you make your products or services more affordable for them.
On the merchant’s end, offering financing to customers increases buyer conversion and customer loyalty. In fact, one study found that offering consumer credit options increases a customer’s average order size by 15%. Plus, 93% of customers in this study who used credit options said they would make use of them again.
Therefore, if you think customer financing could benefit your small business, you’ll want to know how to offer financing to your customers. On the whole, there are two main ways to go about offering customer financing. The first option is to run credit checks, offer financing, and manage payment collection on your own. This option, however, takes up significant time and comes with the legal responsibilities surrounding the use of consumer credit information.
The second option, then, is to rely on a third-party firm in order to offer financing to your customers. By working with a third-party provider, the firm is responsible for making credit offers and collecting customer payments, saving time and transferring some of the legal risks away from your business.
Since the latter is the option that’s likely going to work best for most businesses, let’s discuss how the process works. When using a third-party provider, here’s how to offer financing to customers:
As you can see then, the process involved in offering customer financing is actually pretty simple. The most important step when it comes to the question of how to offer financing to your customers, then, is to choose the best provider for your business.
Photo credit: Everlane
Although there are dozens of providers on the market that can help businesses offer customer financing, not all of them are right for small business owners. Many of these providers require certain sales minimums or a minimum number of financed purchases each month, and they take a large cut out of financed purchases.
Therefore, if you decide to offer financing to your customers, you’ll want to be sure you choose the right provider for your business. To help you start your search, we’ve gathered a handful of customer financing providers who have reasonable fees and no minimums—making them good options for small businesses. Plus, when you opt for one of these digital platforms, your customer can apply for financing in your store, online, or right from their smartphones.
Here are five customer financing platforms you might consider:
Viabill is designed for online small businesses that want to offer financing to their customers. Instead of having to pay the full purchase price, customers can split the cost into four equal monthly payments. Whether you use Shopify, Magento, WooCommerce, or another platform for your ecommerce shop, you can seamlessly integrate Viabill into your online checkout within hours. You’ll pay a fee of 2.90% plus 30 cents per transaction, similar to typical online credit card processing fees.
When customers sign up for financing through Viabill, there are no credit checks and they’ll find out almost instantly if they’re approved. Viabill requires 25% of the purchase at checkout and then breaks up the remaining three payments equally—with no interest or additional fees. With all of their direct ecommerce integrations, therefore, Viabill is a particularly noteworthy option for online-based businesses.
There are many popular PayPal small business solutions, but one that you might not be familiar with is PayPal Credit. PayPal Credit is a great way for online businesses, particularly those that already accept PayPal as a form of payment, to offer customer financing. This program lets you add a financing button or banner to your online checkout when your customer checks out with PayPal on your website. PayPal will make a credit decision for your customer within seconds.
The PayPal Credit service is free for merchants who already accept PayPal, meaning you’ll only be paying your current PayPal transaction fees to offer customer financing. Moreover, customers don’t have to pay any interest if they pay in full for a good or service that’s at least $99 within six months. So—if you already use PayPal, it’s definitely worth considering their credit service to offer financing for your customers.
Financeit offers customer financing for purchases of up to $60,000. They don’t charge transaction fees, and the standard program is free, too. Your customer can apply for Financeit customer financing from their smartphone in your store, or on your website using the Financeit digital tools—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 customer an interest rate depending on their creditworthiness, region, and the size of the payment plan. With their $60,000 financing limit, Financeit is a great option for businesses who sell products or services at a higher price point, like furniture or other home improvement goods and services.
LendPro’s customer financing platform integrates with your small business website, so your customers can check their financing options from the comfort of their own homes. They work with industries that normally sell expensive items, such as home goods, automotive, and jewelry. LendPro also sells application kiosks that you can install in your store. If your customer decides to pursue a payment plan, LendPro lets them evaluate multiple options through their application process. They provide payment plans and interest rates for all levels of creditworthiness and payment amounts.
For business owners, LendPro offers two solutions to allow you to offer customer financing—their enterprise solution and their financing in a box solution. In order to find out the cost of either solution, however, you’ll have to contact LendPro and work with them directly. This being said, though, with options designed for both smaller and larger entities, LendPro can be a worthy option for a wide variety of businesses.
Afterpay is a customer financing platform that has been utilized by some of the biggest names in retail, including Urban Outfitters, Anthropologie, and Everlane. Unlike LendPro and Financeit, which specialize in big-ticket items, Afterpay finances small discretionary purchases, such as clothing, jewelry, and housewares.
Your shoppers will see the Afterpay option while browsing on your online store and can fill out a short form for an instant approval decision. If approved, the customer can pay for the order in four equal installments due every two weeks with the first payment due upfront. They offer zero-interest financing for customers and do not charge fees if paid on time.
Afterpay will pay your business the full amount of the purchase right away so you can ship orders just like any other purchase. To utilize the Afterpay service, you’ll have to pay 4–6% plus 30 cents on each financed transaction. Additionally, Afterpay integrates directly with top ecommerce platforms like BigCommerce, Shopify, Magento, and more—making this a great, quick, and easy solution for smaller online-based businesses.
Ultimately, as we’ve seen through exploring these five different providers, the cost of customer financing will depend on which provider you choose.
This being said, however, in order to decide whether or not you should offer financing to your customers, you’ll want to do a cost-benefit analysis. Although you’ll likely convert more customers and make bigger sales, the cost of the financing needs to make sense for your company.
As we mentioned above, a few programs, such as PayPal Credit, don’t charge any additional fees to the merchant. However, most customer financing programs charge businesses a 2–6% fee per transaction, plus a fixed $0.20 to $0.30—similar to the per-transaction cost of accepting payments online through a payment processor. Additionally, a few other providers charge a monthly fee, around $40 to $50, for a specific or unlimited number of financed transactions.
Therefore, when assessing the cost-benefit analysis, it helps to have a few months of data to review. Once you see how many customers are utilizing their financing option and how much it’s costing you, you can make an informed decision about whether to offer customer financing long-term.
As always, when considering a new business model, you’re going to want to weigh the pros and cons to make sure it’s the right option for you. When it comes to customer financing, there are some obvious benefits, as well as a couple of hidden risks to prepare for. Let’s take a look.
As we mentioned earlier, there are a variety of studies that show offering financing to customers is ultimately beneficial for merchants. Therefore, let’s explore some of the top benefits of customer financing for small businesses.
At the end of the day, and as we discussed, the general purpose of customer financing is to increase your sales by turning more browsers into buyers. By offering a payment plan on your expensive items, then, you’re making it possible for customers who might have otherwise left your store without buying anything to complete a larger purchase. Therefore, by encouraging customers to complete more sales of more expensive items, you’re creating more revenue for your business.
Ideally, by offering customer financing, you’re not only increasing your sales, but gaining customers you otherwise would not have attracted. To explain, 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. Moreover, the same 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—thereby increasing your customer retention.
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. This is a huge benefit as it not only limits the risk for you, but it also increases your immediate cash flow, making it easier to invest in other parts of your business. In this way, you’re offering your customer a service that is valuable and helpful to them, while increasing your business’s cash flow, since financed-backed purchases act as any other purchase that was paid in full upfront.
Despite these notable benefits, customer financing may not be right for every small business, especially if you choose not to work with a third-party provider. This being said, you’ll want to consider these drawbacks when considering how to offer financing to your customers:
Even if you do a thorough credit check before financing a customer—which is certainly a best practice—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.
Additionally, even if you utilize a third-party provider, most merchant contracts state that they have the right to terminate the agreement at any time. A frequency of chargebacks or problems with customers may make a provider more likely to cancel your account.
If you choose to offer customer financing yourself, you may save money by not hiring an outside company—but you will have to calculate the cost of the increased size of your accounts receivable department. Whether you need to hire another employee, or you have to spend your own time tracking and following up on financing payments, taking on customer financing yourself will mean added expenses.
Once again, if you don’t work with a third-party provider to offer financing to your customers, and instead offer it on your own, you’ll see an adverse impact on your cash flow, at least in the beginning. Eventually, you’ll start receiving the required payments from your customers, but if having cash on hand is important to your business, offering in-house customer financing might not be the best option for you.
Now that you know how to offer financing to customers, as well as some of the top options for working with third-party providers, it’s up to you to decide if this financing model is right for your business. In order to make this decision, there are a few points you can consider.
First, you’ll want to think about whether or not your customers will take advantage of this service. If you think your customers will want to use this financing option and that a third-party provider will qualify them to be able to do so, it may be worth offering customer financing.
This being said, before signing up with a financing company (especially one that charges you), you might try to gauge interest in this service with your customer base. You could 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 that it would incentivize them to buy an item that they otherwise wouldn’t—then customer financing could boost your business’s sales and customer satisfaction.
Another aspect to consider is what you’re actually selling. Typically, customer financing is proven to work best for big-ticket items, like furniture or appliances. However, even if you’re selling products like clothes or smaller decor that are more affordable, a financing program—using a specialized service like Afterpay, for example—might be useful. In fact, many businesses that sell items to a millennial audience, like ThirdLove, ColourPop, and Forever 21, have incorporated customer financing. Once again, you’ll want to consider how the product you’re selling might influence buyers to or discourage them from utilizing customer financing.
Finally, you’ll want to consider the cost of offering this type of financing. Not only will you want to think about the actual per transaction cost that you would incur from a third-party provider, but any tangential costs as well—time and money to implement the program, train your employees, to maintain the process, etc. If you’re wondering how to offer financing to your customers with third-party providers, keep in mind that the fewer fees a provider charges and the more assistance they offer for setup and maintenance, the better.
With all of this in mind, offering financing to customers is ultimately a win-win situation for many small businesses. You get more conversion and bigger sales. Your customers get the product or service they want or need. Therefore, if you determine that customer financing is something you’d like to test for your business, the most important thing is to find a financing program that works for you and your customer base.
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.