Customer Financing: Advantages and Disadvantages

Your business is set up and you’re ready to bring in customers. However, your potential customers are walking away (or abandoning their carts) without finalizing their purchase. One of the reasons they may have stopped shopping is the price of your item or service. They may want to buy from you, but the cost is simply too much at the time. How can you retain these interested customers?

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Many business owners are turning to finance options to help secure these visitors and convert them into customers. Offering your customers financing options is a tried and true way to increase revenue and establish strong foundations for coveted repeat customer business. Which consumer financing option is best for you? Here, we’ll review what customer financing is, how it works, and the pros and cons of establishing a customer financing program.

What is customer financing, and how does it work?

Customer financing lets customers enroll in a payment plan to purchase goods or services. Like a credit card, instead of fronting the full cost of the purchase upfront, customers can pay out the total cost – typically with interest and/or fees – over a predetermined period. Your customer will receive the item right away as if the item or service was paid for in full upfront.

To explore the customer financing option, your customer will apply for financing at checkout. This typically involves a credit check to confirm the creditworthiness of your customer. If approved, your customer will make monthly payments to the financing company, and you will receive the total cost of the item at the time of their purchase.

What are the costs involved with customer financing?

Generally, customers pay an interest fee and/or other management fees to obtain customer financing. This percentage can vary depending on the company, the financing terms, and the creditworthiness of the customer, among other factors.

The costs a business pays to access financing varies as well. There are two main models available: you can manage the entire process yourself from A to Z, or you can outsource credit checks and payment collection services to a third party that manages the process on your behalf. If your customer financing options are run in-house, you’ll have to pay the costs related to conducting credit checks and collecting payments, including staffing and software. If you opt for a third party, you’ll pay a small fee to the financing company for each transaction or a flat monthly fee to access the service.

Pros of customer financing for business owners

  1. Increased sales: A lack of payment options can cause your customer to abandon their cart. Offering customer financing allows them an additional option for checking out on their terms.
  2. Capture customers on the spot: New customers are only 5 to 20 percent likely to make a purchase, making that first purchase a crucial one to land. Once you acquire a customer, there is a 60 to 70 percent chance that the customer will return to make another purchase. Offering customer financing is yet another way to increase the possibility that a customer will complete the checkout process and take home your product.
  3. Upfront payments: You won’t have to wait to collect your money. The finance company of your choice pays you right away, while they are responsible for handling payment collection from your customer.
  4. Better prices for the customer: Visitors to your website may hesitate to check out if your price is higher than what they are willing to spend. By splitting up a large payment into several smaller ones, they can get the goods or services they want without impressing any difficult financial demand on themselves.

Cons of customer financing for business owners

  1. You might have to pay a fee for the service. Most customer financing options aren’t available for free, especially options that handle the process for you. Some providers charge a flat monthly fee to use their service, while others charge a percentage on each successful transaction. You’ll have to decide which model is best for your business, and more importantly, what your business can afford.
  2. You might have to meet minimums to use the service. Some providers require that you meet a certain transaction threshold to use them, or be charged a fee. Ask your potential customer financing partner to clarify if this is a condition to use their service.
  3. It could raise your customer acquisition cost. While customer financing options are good for securing new customers, the amount you pay to attract that new customer may not be worth it. It’s best to assess the tool of your choice after using it for a few months so you can properly assess the data and see if your costs went up.
  4. It could possibly create bad debt. Even with a credit check, you can’t predict if a customer may default on payments. It’s certainly possible, even with stellar credentials, that a customer doesn’t make their payments. Even if you do collect your payment upfront, there’s a chance that a provider may drop your business if you attract too many customers who renege on the terms of their agreement.

Is customer financing right for your business?

Bringing in new customers is one of the most challenging aspects of running a business. Offering customer financing options is one way to help attract and retain newcomers while giving customers the tools they need to access the products they want. However, offering customer financing is an individualized decision that comes down to understanding your business’s main goals and the tools you need to meet those goals.

If you decide to move forward with customer financing options, there’s no right or wrong way to establish the program at your company. You may prefer to hire your own staff and build out a customer financing department in-house. You may choose to pay a fee to a third-party service to handle the process for you. Whichever route you take, offering your customers the opportunity to finance their purchase can make the difference between closing a sale and losing a potential new, long-term customer.