Customer financing gives people with limited budgets the ability to nab your products or services on a payment plan. Read on for considerations you should make when offering customer financing for a small business.
What is customer financing?
Customer financing options let consumers acquire goods or services from a business up-front without paying for them in full at time of purchase. For example, if you’ve ever purchased a new cell phone that you paid for on a payment plan, the business you obtained the phone from offered customer financing.
You might be asking, “When does the customer pay me if not at the time of sale?” What happens is that a third-party consumer financing company pays you, not the customer.
The financing company pays you for the product or service up-front. Then your customer pays the financing company back in installments on a payment plan. That means that a customer on a limited budgeted doesn’t have to wait to get his or her hands on your latest products and sales.
At the same time, your business benefits from increased sales. It’s a win-win.
Is it suitable for your business offering and target consumer?
The first factor to consider when offering customer financing for your small business is whether it makes sense for the products or services you offer.
Do you offer relatively inexpensive products or services or bigger ticket products or services? And how much of your target consumer has the funds to pay for these products or services up-front?
You might want to offer customer financing if your average buyer would be hesitant or unable to acquire your goods and services without a payment plan because of cost.
Will consumer financing companies approve your target consumer?
In order to participate in a payment plan, your customers will have to apply for financing with the consumer financing company you’ve chosen. Usually, customers will need a decent credit rating to qualify for financing.
You should research the credit requirements of various consumer financing companies and determine whether your average target consumer would qualify for financing or not.
Are your products or services eligible for a payment plan?
Consumer financing companies don’t permit products or services of all types or costs to be paid in installments. For example, a financing company may put in place a minimum cost threshold.
Products or services below that threshold might not be eligible to be paid for in installments. In the case of differing requirements, it’s important to check whether the types and costs of goods or services you’re offering are eligible for the payment plans offered by the financing company you choose.
What’s the cost of consumer financing?
You should only offer customer financing for your small business if both you and your customers can afford it. The cost of implementing a customer financing program to you the merchant depends on which consumer financing company you use.
Some companies are free for the merchant. Others charge you for a percentage of each sale (e.g. 3 percent) and others charge a flat monthly rate, usually from $40 to $50 per month. With this in mind, you should think about whether these fees are outweighed by the volume of sales made possible by offering financing options.
The cost to your customer of using customer financing usually comes down to the amount of each installment and the interest. Therefore, be mindful that customer financing options with high-interest rates can place an undue financial burden on your customers.
How easy is it to set up?
Setting up a customer financing option should be painless for you the merchant. In addition, applying for customer financing and enrolling in a payment plan should be painless for your customers. If possible, avoid programs that require you to integrate costly or complex equipment into your existing payment infrastructure or your customers to fill out lengthy paperwork.
Fortunately, many financing companies, from
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.