Customer financing is an area of credit that most customers are now accustomed to, and most businesses feel the need to offer in order to survive and grow.
It is a service that offers customers a finance option—a buy now, pay later solution—to help them pay for goods and services over time.
Customer financing can be seen as a win-win situation for customers and businesses; however, you must have robust credit policies and procedures in place to stringently manage this type of financing and ensure that invoice collection is still adhered to and that you receive full payment.
In this post, we discuss what is customer finance, the types of customer financing available, and the pros and cons of offering such a financing solution.
Customer Finance
Customer financing is a way to help you guarantee the sale by offering your customers a buy now, pay later finance option.
Typically, customer financing involves the customer completing an application process and agreeing to fixed payments over a set period of time—this can range from 6 weeks to 24 months.
There are two types of customer financing:
- Primary – which includes credit cards and your typical standard loans.
- Secondary – includes lease-to-own loans.
In addition, there are also the options of:
In-house financing—When offering finance options in-house, the business is the creditor offering various finance solutions. With this option, you, of course, have complete control. However, it is also more time-consuming, you may run into additional costs as you may have to pay the costs associated with carrying out the credit checks, and you will be solely responsible for collecting payments and chasing invoices.
With this option, it is vital that you have a team with a strong credit policy behind them and the most appropriate systems and software to manage your accounts receivable.
(Make sure to check out our post on Statutory Demand – the next step for businesses to take when faced with late payment of invoices.)
If opting for in-house finance options, it’s crucial that you evaluate everything. This means:
- Checking a customer’s credit history.
- Do they have to spend a minimum amount?
- Do your customers actually want these finance options?
- Are you able to offer competitive rates?
- Do you have the resources to carry out credit checks and collect payments in-house?
- Are you able to manage more of the legal responsibility that comes with in-house financing?
In-house financing can be used to help you scale your business, but your cash flow must be able to handle this, as with buy now, pay later options, where you don’t get paid straight away, it can be risky. With this in mind, are you limited in what you offer?
The alternative to in-house financing is third-party financing. In this instance, a business uses a third party to act as a lender at the point of sale.
Here, the customer will enter into a payment plan for a one-off purchase with repayments agreed on and paid back over a period of time.
Third parties are often able to approve a wide range of credit, often over an interest-free period.
The most popular form of third-party financing is buy now pay later, short-term, interest-free finance.
When choosing this option, you may typically find a fixed fee per transaction. The third party will carry out all the credit checks, be responsible for payment collections, and ensure their credit teams chase invoices.
Finance providers can include PayPal, Klarna, AfterPay, etc.
Whatever type of customer finance you opt for, it is important to have good quality controls in place, strong credit procedures, and good working relationships with your customers and third party credit providers.
In all instances, you want to be confident that you will be paid for the goods and services you provide.
Benefits of offering customer financing options
- It can attract more customers, increasing your order values.
- It helps those customers who may not be able to pay the full amount upfront.
- It can help to increase sales as you provide an additional payment option.
Disadvantages of customer financing:
- It can be complex if you don’t have the right processes and procedures in place to manage your offer.
- There is the risk of building up bad debt as late payments increase and chasing overdue payments becomes unmanageable.
- You may experience an increase in fees and additional expenses as you cover the cost of credit checks and other services.
What is customer finance?
The option of customer financing is a good one to offer, whether this is your own financing solution or through a third-party.
Supporting your customer base, boosting order size and value, and, in the end, increasing sales are some of the many reasons to encourage customer financing.
However, having the right credit protocols in place to manage these areas is vital.
At Direct Route, we can help you collect outstanding invoices, avoid the pitfalls of building up outstanding debts, and create a credit team and procedures that can manage all finance areas successfully.
To speak to a team member today to see how we can help, call us on 01274223190.