Customer Financing for Small Businesses
For small businesses, finding ways to increase sales while maintaining cash flow can be a constant challenge. One of the most effective solutions for growing businesses is customer financing. By offering financing options, businesses can make their products and services more accessible to customers, which in turn can increase sales and expand their customer base.
This blog post will explore how customer financing works, the benefits it offers for small businesses, and the key factors to consider when implementing a financing program.
What Is Customer Financing?
Customer financing allows customers to purchase products or services by spreading the cost over time through payment plans or installment options. Instead of paying the full amount upfront, customers can finance their purchase through a third-party lender or directly from the business, paying in smaller amounts over an agreed-upon period.
Types of Customer Financing:
Installment Plans: The customer pays the total purchase amount in monthly or weekly installments over a set period.
Buy Now, Pay Later (BNPL): Customers receive the product or service immediately but have a delayed payment period, often with no interest if paid within a specified time.
Credit-Based Financing: Customers apply for credit through a financial institution, which pays the business in full while the customer repays the loan over time.
Popular platforms such as Affirm, Klarna, and Afterpay have brought customer financing into the mainstream, making it easier for small businesses to implement this payment option.
Why Small Businesses Should Offer Customer Financing
Customer financing offers a range of benefits for both businesses and customers, making it an attractive option for small businesses looking to boost sales and improve customer satisfaction.
1. Increased Sales and Larger Average Order Value
One of the primary advantages of offering financing is that it allows customers to make larger purchases. When customers don't have to pay the full amount upfront, they're more likely to buy higher-priced items, leading to an increase in both sales and the average order value.
For example, a small business selling home appliances might find that offering installment plans encourages customers to choose more expensive models, knowing they can spread out the cost over time.
2. Improved Customer Loyalty and Retention
Financing can also enhance customer loyalty. By making your products and services more affordable, you can build a stronger relationship with customers who might not have been able to afford your offerings otherwise. Repeat customers are more likely to take advantage of financing options, especially if the process is simple and offers favorable terms.
Stat Fact: According to a survey by PYMNTS.com, 42% of customers say they are more likely to make a repeat purchase if financing options are available.
3. Better Cash Flow for the Business
When customer financing is offered through a third-party lender, businesses receive the full purchase amount upfront. This arrangement improves cash flow, as the third party assumes the risk and the customer repays the lender over time. This model allows small businesses to avoid the financial burden of waiting for installment payments while still offering flexible payment options to customers.
4. Expand Customer Base
Customer financing opens the door to a wider customer base, especially among shoppers who may not have immediate access to large sums of money but are willing to make purchases if they can spread out the cost. Offering financing helps small businesses attract more customers from various financial backgrounds, including younger customers who may prefer payment flexibility over using credit cards.
How Customer Financing Works: The Process
Offering customer financing is a straightforward process that typically involves partnering with a third-party lender or using a financing platform.
1. Choose a Financing Partner
The first step for businesses is to choose a financing partner. These are third-party lenders or payment platforms that provide financing services to customers on behalf of the business. Popular platforms for small businesses include:
Affirm: Provides short-term installment loans for customers, allowing them to pay over time.
Klarna: Offers "Pay in 4" interest-free installments or longer-term financing options.
Afterpay: Customers pay for their purchases in four interest-free payments spread over six weeks.
2. Customer Application Process
Once a financing partner is in place, customers can apply for financing directly at checkout. The application process is typically simple and quick, with most financing platforms requiring basic information such as income and credit score.
3. Instant Approval and Payment
If approved, the financing company pays the business in full upfront, and the customer begins making payments according to the agreed-upon schedule. The business is not responsible for collecting payments from the customer—the financing partner handles the repayment process.
4. Transaction Fees
Most third-party financing providers charge the business a transaction fee, usually between 2% and 8% of the purchase amount. This fee varies based on the provider and the terms of the financing agreement.
Key Considerations When Offering Customer Financing
While offering financing can boost sales, there are a few factors that small businesses should consider before implementing a financing program.
1. Costs and Fees
Partnering with a third-party financing provider typically involves transaction fees that reduce your profit margin. It’s important to factor these costs into your pricing strategy and ensure that the increased sales volume justifies the fees.
Pro Tip: Consider negotiating lower transaction fees with your financing partner if your business starts to generate a significant volume of financed sales.
2. Credit Risk and Approval Rates
The approval rate for financing applications can vary depending on the platform and customer credit scores. If a large percentage of your customers are denied financing, it may not provide the desired impact on sales. Be sure to choose a financing partner that aligns with your target audience's credit profiles.
3. Customer Communication
Clear communication is key to ensuring a positive financing experience for your customers. Make sure that customers fully understand the terms of the financing agreement, including interest rates, repayment schedules, and any penalties for late payments. Transparency builds trust and encourages repeat business.
4. Compliance and Legal Considerations
Ensure that any financing options you offer comply with consumer protection laws and regulations. Financing terms must be fair and transparent, and it’s important to disclose all costs and fees associated with the payment plans.
Real-World Examples of Customer Financing Success
Several small businesses have successfully implemented customer financing, leading to significant growth in sales and customer satisfaction.
Example 1: Peloton
Peloton, the fitness equipment company, saw a major increase in sales after offering customer financing through Affirm. Many customers who were hesitant to purchase high-priced exercise equipment were more inclined to buy after being offered the option to pay in monthly installments. This financing model helped Peloton grow its revenue and expand its customer base, making premium fitness equipment more accessible.
Example 2: Purple Mattress
Purple, a mattress company, also implemented customer financing options to attract more buyers for their premium products. By partnering with Affirm, they allowed customers to spread the cost of mattresses over time, making it easier for people to purchase high-ticket items without financial strain. This strategy helped Purple Mattress increase both sales volume and customer loyalty.
Top Customer Financing Providers for Small Businesses
Here are a few of the most popular customer financing platforms that small businesses can consider:
Affirm: Offers customers the ability to pay over time with flexible monthly payment options.
Klarna: Provides multiple payment options, including interest-free installments and longer-term financing.
Afterpay: Focuses on "Pay in 4" interest-free installments, commonly used by retailers and e-commerce businesses.
PayPal Credit: Allows customers to finance purchases through PayPal, offering flexible repayment options.
Sezzle: Offers a "Buy Now, Pay Later" model, allowing customers to make purchases in four interest-free installments.
Each of these platforms offers unique features, so it's important to choose the one that best suits your business model and customer base.
Conclusion
Customer financing is a powerful tool that small businesses can use to increase sales, attract new customers, and improve cash flow. By offering flexible payment options, businesses can make their products and services more accessible, leading to higher average order values and enhanced customer loyalty. However, it’s crucial to carefully consider the costs, risks, and compliance factors before implementing a financing program.
If you're ready to grow your business and provide customers with flexible payment options, explore the various financing platforms available and find the one that best fits your needs. With the right approach, customer financing can be a win-win for both your business and your customers.
