CUSTOMER FINANCING: Definition, Types & Importance

Customer financing enables small business customers to pay for a purchase over time rather than in full at the outset. Customers can get financing from a business either by setting up a process in-house or by signing a contract with a third-party provider. In addition to marketing and advertising, giving customers a new way to pay could help your business make more money. In this post, we’ll look at what customer financing is and how to offer it to small businesses and contractors. We will also see some providers who offer customer financing services.

What is Customer Financing?

Customer financing solutions give your customers the choice of a payment plan or something similar if they can’t or won’t pay for your products or services in full. For example, instead of paying $300 for an item up front, your customer could make four $75 payments.

The customer may owe interest on their monthly payments if they use a third-party provider, but the business will usually receive the full payment at the time of purchase. Because the business typically receives the money upfront and the customer makes payments to another party, the mechanics can be similar to those of a credit card for both the business and the customer. Customer financing is also available as a store credit card.

Customer Financing for Contractors

Contractors provide vital financing to their customers, and as with most vital work, it often comes with a hefty bill. Because of this, customers will put off doing important things, which will lead to bigger repair needs in the future.

This is where customer financing comes in. Allowing customers to divide their bills into more manageable monthly payments makes it easier for them to complete tasks as needed and budget for the bill.

Contractors have a few customer financing options, which are as follows:

Their credit card
Third-party personal loan
A consumer financing platform like Skeps

Let’s go over each of these to determine which is the best customer financing for contractors.

#1. Personal loans and credit cards

When we discuss these financing options, we are referring to third-party financing that the consumer seeks out on their own. These financing options may be convenient for the customer, but they often add a complicated step before the sale, making it less likely that the customer will buy. It adds a lot of work to the consumer’s workload because they must look for financing on their own and may not be presented with the most appealing financing offer.

#2. Consumer financing platforms

A consumer financing platform is a software tool created by a fintech company with which contractors can collaborate. This makes it easier for a simple application process to be built into the contractor’s website or billing system. Customer financing software can provide any type of financing for contractors, including:

Credit cards
Consumer loans and leases
Buy now, pay later (BNPL) payment plans

They can do this because they work with several lenders to make sure that customers get the best deal for their situation. By working with a fintech, contractors can keep the customer’s focus on the sale while giving them the financing they need to make a purchase.

Customer Financing for Small Businesses

If you own a small business, the financial resources of your customers may eventually play a role in your company’s success. This is especially true if you offer more expensive goods or services. So, how do you encourage people to check out and make a purchase without lowering your prices and jeopardizing your bottom line?

Customer financing is one possible solution. Customer financing, also known as consumer financing, is a method for a small business to buy now and pay later. You can either provide financing in-house or use a third-party financing company. Customers and small business owners can both benefit from customer financing. Customers get what they want, and you close sales on higher-priced goods and services.

#1. In-house loans

In-house customer financing may be a good fit for your small business if you sell higher-priced goods or services. Furniture, appliances, electronics, and home improvements and repairs are some examples of products and services that customers may want to finance.

For in-house loans, you will need to pay for credit checks and payment collection, which require both software and staffing, as previously mentioned. You’ll also need to create a credit policy for your business and decide how you’ll accept partial payments from customers.

#2. Third-party consumer financing

Third-party consumer financing has recently grown in popularity among all types of businesses, particularly online retailers. Among the most popular online third-party financing providers are:

AfterPay
Affirm
Klarna
PayPal
Quadpay

Customers can use these third-party financers to pay part of the cost of the items they buy, and most of the time they don’t charge interest. Installment payments are frequently due biweekly or monthly.

#3. Layaway

Layaway is a payment plan in which a business reserves a product for a customer and holds it until the customer pays for it, typically in a series of partial payments. In contrast to other small business financing options, a layaway agreement does not allow the customer to receive the item until it is fully paid for.

Customer Financing Offer

As was already said, customer financing gives customers options if they want to buy your goods or services but can’t pay for them all at once. Since the latter is likely to be the best option for most businesses, let’s go over how the process works. Here’s how to offer financing to a customer when using a third-party provider:

The customer first sees a product or service they want to purchase, either in-store or online.
The customer will then apply for financing because they cannot afford the full price but still want to purchase the product. You’ll want to make sure you’ve advertised that you offer customer financing so that potential buyers are aware of this option. Customers will be able to apply for financing using the online checkout cart, their smartphones, or your POS system, depending on your business.
Your customer will know whether they have been approved or denied for financing within seconds. If the customer is approved, you will receive immediate payment for the product.
Your customer will receive the product or service right away, but they will repay the financing provider in installments. The provider with whom you work will determine the customer’s payment schedule and how much of the purchase they must pay in advance.
Unless the financing provider offers a promotion, the customer will usually have to pay interest. Furthermore, as with any other credit card processor, you may be required to pay a small percentage per financed transaction.

The most important step in determining how to offer customer financing is to select the best provider for your business.

Customer Financing Services

There are a lot of companies that offer customer financing to businesses, but not all of them are good for small business owners. Many of these providers have monthly sales minimums or a minimum number of financed purchases, and they take a large cut of the financed purchases.

As a result, if you decide to offer customer financing, make sure you select the right provider for your business services. To help you get started, we’ve compiled a list of customer financing services with reasonable fees and no minimums, making them suitable for small businesses. Here are six customer financing platforms to think about:

#1. PayPal

If you already accept payments through PayPal, adding PayPal Credit as an option can be simple. It’s already built into your online checkout process and won’t cost you anything extra aside from your current 2.9% plus 30 cents per transaction fee. You can include PayPal Credit banners on your website to inform customers that this option is available.

#2. ViaBill

Customers of online shops can get up to $300 in interest-free financing from ViaBill. Customers can divide their payments into four equal monthly installments with ViaBill. The first payment is taken when the customer order is processed, and the remaining three payments are deducted automatically over the next three months.

#3. Afterpay

Afterpay is a customer financing platform used by some of the most well-known retailers, such as Urban Outfitters, Anthropologie, and Everlane. Unlike LendPro and Financeit, which focus on large-ticket items, Afterpay finances small-ticket items such as clothing, jewelry, and housewares.

#4. Wells Fargo

Wells Fargo’s customer financing services enable you to provide your customers with on-the-spot financing options. After a simple application process, customers who are approved will have instant access to a revolving line of credit that they can use to buy from your business in the future.

Wells Fargo provides training to assist you in setting up the financing. When a customer uses Wells Fargo financing, the funds are typically deposited into your account within 48 hours.

#5. Financeit

If you need to offer customer financing for larger purchases, Financeit provides credit limits of up to $100,000. Personalize a quote to show your customers monthly payment options that fit their budget, either in-store using a payment calculator or online using website tools.

#6. LendPro

LendPro’s customer financing platform works with your small business website so that your customers can look into financing options from the comfort of their own homes. They work with industries that usually sell high-priced items, such as home furnishings, automobiles, and jewelry.

Pros and Cons of Offering Customer Financing

Small business owners should weigh the advantages and disadvantages of providing consumer financing. We’ve outlined some of the benefits and drawbacks below.

Benefits of consumer financing

#1. Increase order values:

When businesses offer customer financing, order size rises by 15% on average. As a result, larger orders result in more revenue, which helps your bottom line. Furthermore, the customer gets to buy exactly what they want, rather than an option that may or may not be exactly what they need.

#2. Decrease hassle:

If you choose to work with a third-party financing provider, you won’t have to deal with account management or nonpayment issues. Instead, you can concentrate on the expansion of your business and rely on more consistent cash flow.

#3. Increases your sales:

When consumers are deciding whether to make a purchase, the initial upfront cost and sticker shock can be significant obstacles to overcome. Customers may be able to afford smaller monthly payments if the cost of a product or service can be divided into smaller monthly payments. “Buy now, pay later” is an excellent strategy for increasing sales of both high-ticket items and large order sizes of less expensive items.

Drawbacks of customer financing

#1. Fees and expenses:

You will almost certainly have to pay fees if you use a third-party financing provider. Some providers charge a flat monthly fee, while others charge a percentage of each transaction. Offering in-house financing may necessitate investments in both personnel and software.

#2. Minimums:

Before you can offer financing to customers during the checkout process, some providers require a certain transaction amount.

#3. Customer acquisition costs include:

Although financing is a great way to attract new customers, the cost may not be worth it. After a few months of using customer financing, you should evaluate the return on investment to ensure it is a good decision for your company.

How do you finance your customers?

Customer financing is one possible solution. Customer financing, also known as consumer financing, is a method of buying now and paying later. You can either provide financing in-house or use a third-party financing company.

Third-party consumer credit;

AfterPay.
Affirm.
Klarna.
PayPal.
Quadpay.

What are the three types of financing?

Personal finance, public finance, and business finance are the three types of finance.

What is an example of consumer finance?

The main consumer financial markets are mortgage loans, student loans, auto loans, credit cards and payments, payday loans, other alternative credit financial products, and checking accounts and alternatives.

Conclusion

Whether you’re a first-time contractor or have a full work schedule for the year, customer financing for contractors can help you get ahead and improve the quality and size of your projects. Furthermore, it can increase customer satisfaction and simplify the financing process, resulting in more business, projects, and revenue.

Contractor financing not only helps you improve the quality of your work, but it also guarantees payment and allows you to get ahead right from the start and see your project through to completion.