Customer financing may seem like a recent discovery.
However, it has existed across multiple cultures for over 5,000 years...
Today, it is an integral part of many businesses, both online and in-store.
Customers now expect not only flexible direct payment options but also flexible financing choices.
In this blog we will explore different types of customer financing and the key considerations you should have around it.
What is customer financing?
Customer financing is a financial option for businesses to enable their customers to make a purchase now and pay for them later.
This approach benefits both customers and the businesses.
Customers get the flexibility to pay for products and services in instalments or with store credit. And businesses can increase sales and improve customer loyalty.
Differences between 'customer financing' and 'consumer financing'
Customer financing is often referred to interchangeably with consumer financing.
The difference between the two credit terms, is that customer financing is a more general financing term for both consumers and businesses in business-to-business (B2B) and business-to-consumer (B2C) contexts.
By contrast, consumer financing technically refers to financing for individual consumers in B2C contexts.
Types of financing to offer to customers
Customer financing options can be divided into two main groups:
Business-to-consumer (B2C) customer financing options
There are a range of different B2C customer financing options. Some popular types include:
- Store credit: Retail-specific credit offered by stores, enabling customers to make purchases and pay later, sometimes with promotional financing.
- Store credit cards: Credit cards usually co-branded with card networks such as Visa and Mastercard. These can only be used in a specific store (hence also being known as closed-loop cards) for purchases up to a predetermined limit.
- Buy now pay later (BNPL): This enables consumers to delay payment and then complete it - usually interest-free - in instalments on specified dates.
- Personal loans: These typically come with fixed interest rates and terms.
Other forms of industry-specific financing programs exist too. For example, car financing plans and even mortgages.
Business-to-business (B2B) customer financing options
B2B financing options are typically aimed at specific business needs. This could include increasing cashflow in order to fulfil larger orders or invest in specific areas of business.
They are also often used for larger value purchases than are less common in most B2C transactions.
Typical B2B financing options include:
- Business loans: These are loans taken out for specific usage, including business operations or investment in stock, payroll, etc.
- Credit lines: Pre-determined amounts of money that borrowers can access if and when needed, paying interest on the borrowed sum.
- Invoice financing: When businesses receive a portion of value of their invoices upfront from a third party (rather than the customer). When the customer pays the invoice, the third-party provider receives the amount.
- B2B BNPL: This is tailored for companies in the B2B space, which means its repayment terms consider net terms, business cycles, etc.
Where is customer financing offered?
Whether you are running a B2B or a B2C business, you can offer customer financing on all sales channels.
Your online channels should include financing options and rates on both checkout and product pages. And in-store you can also include them at checkout and beside products.
The same point stands with your marketing and communications. Financing options and financing terms can be listed whenever relevant.
Considerations for offering customer financing
1. Do it in-house or use third-party providers
There are two different ways you can offer financing to your customers:
- In-house financing: Being able to directly offer financing to your customers has big advantages. However, setting it up and maintaining it are resource-intensive and involve risk and legal responsibilities.
- Use a third-party financing provider: These providers can save you time and resources. However, there is always a risk of working with an unsuitable provider.
- There are several factors to consider when determining the type of customer financing to offer. For example, for small businesses, a third-party provider is typically the better option.
2. Cost implications
Both in-house and third-party financing options come with costs.
The latter will charge you a monthly fee or a percentage of each financed transaction. Since fees vary by provider, industry, order size, and more, it is crucial to shop around and discuss terms with each potential provider.
In-house customer financing can cause an initial drop in cashflow. This needs to be weighed against current needs and long-term benefits of increased sales.
3. Risks
Customer financing will always involve some level of risk, especially for businesses providing in-house financing.
By contrast, third-party financing providers offer more protection to businesses by paying merchants in full. This is because they determine customer creditworthiness and hold liability for late or failed payments.
4. How it is implemented
Adopting the right financing platform or solution should not disrupt your customers' checkout process.
How you integrate financing is as important as when you integrate it.
It should also be easy for both your customers and your account receivables team to use. And it should be fully integrated with your other software solutions, including all related to on and offline sales channels, accounting, stock monitoring, etc.
Benefits of offering customer financing
Increased competitiveness
Popular retailers usually offer some form of financing. Businesses without customer financing risk losing customers to competitors that provide such options.
It is common these days for many customers to check which merchants offer the flexibility of installment payments.
Increased sales
If you offer financing to customers, you can increase sales in three main ways.
1. By increasing average order value (AOV) of typical customers
Unlike in B2C, gaining financed purchases upfront enables businesses to fulfil larger orders and in turn generate more revenue.
This encourages larger orders, upgraded product versions, and additional purchases.
2. By bringing new customers
Financing expands accessibility for a wide range of customers.
3. Increasing customer loyalty
Providing financing gives your business an advantage over competitors who don't offer it. And providing it well gives you an advantage over competitors who don't.
Drawbacks of offering consumer financing
Risk of debt
In-house customer financing means taking the risk that some customers may not pay back what they owe. This can obviously be detrimental if your business deals with narrow profit margins.
Your third-party financing company might have penalties built into fee structure of their payment plan.
Time-consuming process
Opting for in-house financing over third-party financing requires resources for tracking and following up on each financing program.
The new customers it can bring will further increase sales - which will increase your accounting team's workload.
Increased risk of chargebacks
Customer financing might increase your businesses' chargeback rates.
Part of this will occur naturally from increased sales activities. It can also attract fraudsters submitting chargebacks under false pretences.
This is where the importance of best practices around credit checks, payment collection, payment plans, etc., comes in. This applies to whether you offer in-house financing or rely on third-party providers.
Nuvei's financing solutions
Lenders can now leverage the power of Nuvei's platform to consolidate their payment functions, enhance reliability, and reduce costs. Nuvei's platform integrates seamlessly with loan management software and allows for additional custom applications.
Loans can be securely processed through Nuvei's proprietary gateway or via third party bank card, ACH, Apple Pay and Google Pay. This makes transactions frictionless for loan providers and their customers.
Through its network of banks and subsidiaries, Nuvei supports most forms of lending scenarios, including:
- Online lending platforms
- Conventional secured lending
- Title and payday loans
- Retail installment financing
- Consumer installment loans
- Auto financing
- Short term loans
- Business loan sourcing
Conclusion
Customer financing offers a valuable solution for businesses and customers alike. It ultimately allows B2C and B2B customers to make purchases without upfront payment.
It effectively improves cash flow, which will encourage shoppers and business buyers to spend more.
Businesses can choose between in-house financing and third-party financing companies. each with its considerations and cost implications.
Factors such as customer qualification, minimum spending requirements, and the efficiency of the financing process are crucial to assess.
Offering customer financing can attract new customers, increase average order value, and boost sales. Integration with POS and eCommerce platforms is essential, and effective communication about financing options helps businesses stay competitive.
However, businesses need to be aware of the associated risks, whether using in-house financing or third-party providers.
These risks can include increased risk of debt, time-consuming set up processes, and increased chargeback rates.
.svg)
