What to Consider Before Offering Customer Financing

Looking for a way to boost sales? For some businesses, the answer may be customer financing. A BigCommerce study reports that 36 percent of respondents said financing helped them to make bigger purchases. Another 31 percent said they wouldn’t have made the purchase without it. But financing is not without financial risk to small business owners. Consider whether it’s right for your business. 

How It Works 

A business that offers customer financing allows the customer to apply for credit to purchase an item. If approved, they receive it immediately then make payments over time, usually with interest. 

While you can process the application yourself, many businesses outsource it to a financing company. Processing it yourself requires you to run a credit check, make the offer, then manage ongoing payments, all while adhering to legal requirements. 

With recent increases in online technology, there are a number of companies that will act as your third-party financer and make an offer on the spot. Some of them require a minimum transaction amount or minimum monthly sales total. In addition, you may pay a per transaction fee (anywhere from two to six percent is typical) plus a fixed fee. Fundera offers these companies for consideration because they do not require minimum transaction amounts.

The Pros and Cons

Besides increasing the number and size of new sales, third-party customer financing offers these advantages:

  • Full payment upfront (that has a positive impact on your cash flow)
  • Increased traffic (68 percent of consumers were more likely to shop with businesses offering financing options)
  • Converts customers who are “thinking” about making a bigger-ticket purchase
  • Increases customer loyalty (66 percent of customers who use the finance option will make an additional purchase of at least $500)
  • Financing company assumes the risk of fraud or non-payment

With all of its advantages, you should also consider these potential sticking points:

  • Not all customers will elect the financing option. Consider surveying customers to see if there’s interest. Some finance companies allow you to offer promotional pricing that may increase customer adoption
  • Not all customers will qualify for financing. That can create awkward moments in the sales process. So it’s important to position the option carefully. For example, you can “apply” for financing rather than guaranteeing the option
  • Fees charged by financing companies can eat into your revenue. Look at your past sales record to forecast what the impact might be

Promoting Customer Financing

Deciding to offer customer financing is the first step. But to maximize its value, you need to promote your new option. Here are some ideas to help spread the word:

  • Returning Customers – Build on your existing relationship with promotional offers for loyal customers. For example, 90 days same-as-cash or no interest for six months.
  • Price Tags – Include the per month cost on price tags (both in-store and online). It will remind customers of your financing option and helps to position the item as more affordable. 
  • Socialize – Promote the financing option as part of your social media posts. It can be as simple as adding a banner to your graphic image. Remember to make it a visible part of your website and directory listings as well. 
  • Give Them a Sign – How many times has a “Big Sale!” sign in the window got your attention? So use that technique to promote your financing option—but in unexpected places.  For example, sidewalk signage in front of your store, add it to table tents in the food court, or on a mock-dollar bill that you include in store sacks.

Customer financing can be a viable way to boost sales, especially for bigger-ticket items. Consider whether it’s right for your business. If it is, don’t forget to make it part of your marketing efforts.

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