How to offer your customers finance
A guide to customer finance options for small businesses, including 0% interest finance.
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If you're looking for potential ways to get ahead of your competition, offering your clients finance options, such as point-of-sale (POS) financing options and 0% interest credit, could be just what your business needs to push through.
Depending on the nature of your business and the cost of your inventory, there are a number of finance options designed for small-to-medium-sized enterprises (SMEs) to offer to their customers.
What is customer finance?
Customer finance is a payment plan that customers can use to purchase goods or services from your business. The customer receives finance from a third-party provider that you've partnered with, allowing them to receive their goods upfront and pay off the purchase over time.
Customer finance providers differ in how their repayment plan fees are structured: some offer interest-free plans, while others may charge interest or fees to customers for using the service. You will usually need to pay a merchant fee to offer the service to your customers.
Which businesses can benefit from customer finance?
The best candidates for customer financing are businesses with high-ticket products and services that cost $500 or more. While what constitutes as an expensive purchase varies from customer to customer, whether a customer needs to rely on a credit card to complete the purchase is typically a fair benchmark.
Businesses that sell the following products can benefit from offering customer financing:
- Art
- Bicycles
- Digital cameras
- Drones
- Electronics
- Furniture
- Home appliances
- Jewellery and watches
- Musical instruments
- Swimming pools
As with any lender, the minimum loan amount will vary from one provider to the next. You'll want to try for a minimum that matches your inventory or services, but you should also consider other features that address your and your customers' needs.
What is the benefit of offering customer finance?
Offering finance to your customers can be a good way to convert "I can't afford this right now" into "I'll take it today". A large roadblock for businesses – and in particular, businesses that supply more expensive products or services such as home renovations, furniture retail or wedding services – can be that customers just don't have the upfront cash available. Offering customer finance can boost and potentially even double the number of conversions a business makes.
Some finance providers will even offer training and sales support to promote their finance offering within your business and help you boost your sales.
But while there are many benefits to offering customer finance, there are a few drawbacks to consider as well. We've broken them down for you below.
Pros
- Simple application. Customers can apply for financing on the spot and may even be able to see their rates without a hard credit check.
- Integrated marketing. Some providers allow you to advertise financing on your online store.
- Quick. There's no waiting – customers can buy and receive purchases on the spot.
- Increased conversions. Financing options can help buyers decide to buy more, increasing your bottom line.
Cons
- Declined applications. Though buyers don't need perfect credit to qualify, not everyone is approved for a loan. Ask your provider how it handles loan denials and if customers can reapply.
- Costs. You'll pay to use the provider's services, either as a percentage of the charge or a monthly fee. To avoid surprises, ask about any other fees or charges, like minimum monthly quotas.
- May require hardware. All providers may not work with your existing devices, and extra equipment can be costly.
- Loan minimums. There's the possibility that a lender won't have a minimum amount of financing that meets your needs.
How do you offer finance to customers?
There are a number of ways that you can offer credit to your customer base.
1. 0% interest finance
0% interest finance can be an attractive solution for customers looking to make larger purchases with the ability to pay in instalments. Depending on your business's annual turnover, you may qualify to offer 0% interest finance through a third-party provider.
There are a number of 0% interest providers on the market that offer customer credit options to SMEs. These include buy now pay later options such as Afterpay, Zip and Humm.
How does it work?
First, you need to sign up as a retail partner to be able to offer customer finance in-store, online or both. Then it's easy – your customer will be able to select your chosen customer finance option as the payment method at the checkout and they'll sign up to the plan using their personal details. If the customer has already signed up with the customer finance provider before, they can simply use their credit limit to make a purchase.
The provider may run a credit check on the customer to make sure that they can meet repayments. They'll then offer approval on the spot. The lender will then assume all credit risks, your business will receive the money for the transaction upfront (minus any fees) and the customer will receive their purchase right away.
Most 0% interest credit providers are available both in-store and online. Some interest-free finance providers offer POS material promoting interest-free finance in-store, a well as training and support services for your staff to help to promote interest-free purchasing.
How much does it cost?
The cost of using a 0% interest credit provider will vary depending on the size of your business and your annual turnover. The provider will usually analyse your business credentials and make you an offer based on your circumstances. You may be charged:
- Transaction fees. This fee could be as little as $0.30 but will depend on your business.
- Merchant fees. This is a fee determined by the cost of the purchase. While it's usually around 4-6% of the purchase amount, it will largely depend on the size of your business.
Often providers make their money by offering interest-free introductory periods to customers but will eventually charge interest over time. Some will charge the customer higher fees and the merchant less, and others vice versa. Some interest-free finance providers will also have minimum and maximum transaction requirements. These will vary from lender to lender.
It may be worth speaking to a number of providers prior to submitting an application to make sure that the provider you choose fits your business model best.
What to be aware of
Merchant fees differ among providers. It's important to check these before you sign up with an interest-free provider and ensure they will be manageable for your business.
It's also worth considering whether interest-free finance would work for the nature of your business. If you own a retail store, then interest-free credit might integrate seamlessly. However, it may not be the right fit for all businesses.
How do you compare 0% interest finance providers?
When considering providers, keep both the needs of your customers and the needs of your business in mind.
- Minimum amounts. Try to align the minimum lending amount with the average costs of your products. If you can't find a provider that matches your minimum, you might not need to offer financing.
- Fees. Typically, both merchants and customers pay a fee for POS financing, but some lenders charge more than others. Review all of the terms before agreeing to a provider.
- Application process. Make sure the application process is simple. If the process is too difficult, your customers might abandon their cart.
- Mobile support. Depending on your industry, customers may require access to their loan from a mobile app.
- Who assumes the risk? Avoid taking a hit because a borrower defaults. Confirm that the finance provider takes on the credit risk.
- Available loan terms. Find out if the provider offers short or long-term loans. Long-term loans are better for larger purchases but could cost your customer more in interest. Short-term loans can come with no or little interest, but more expensive purchases can have high monthly payments.
- Promotions and rewards. Some providers offer 0% interest financing, but only for qualified businesses.
- Funding time. Confirm how long it takes to receive the cash from your sales.
- Extra equipment. Find out if you need to buy new hardware to support the provider's services.
2. Small business finance
As well as interest-free finance, there are also some small business finance providers that may offer customer finance for your business. These include:
- Certain business equipment leasing/customer finance companies
- Some credit unions
- Some online lenders
Unlike interest-free credit providers, you may have to do a bit of digging to find out which small business lenders provide this specific type of finance, as it may not necessarily be obvious from their websites.
How does it work?
As with interest-free finance, once you've made an agreement with a provider, your customers will be able to sign up to the payment plan online or in-store. The third party will usually run a credit check on your customers and they will usually be approved for finance on the spot, but this could vary from lender to lender.
Once your customer is approved for finance, they will receive their items or service right away and you will receive payment upfront.
How much does it cost?
The cost of small business customer finance will vary from lender to lender and will also depend on the size and nature of your business. The costs may include:
- Interest charges. Interest charges will likely be charged to your customers and will vary from lender to lender.
- Transaction fees. The merchant may be charged a fee per transaction.
- Merchant fees. As with interest-free finance, you may be charged a percentage of the transaction as a fee. This percentage will vary depending on your lender and the agreement in place.
- Monthly fees. You may have to pay a monthly fee for this service. This could be for a specific or an unlimited amount of transactions.
- Annual fees. There may also be annual flat fees for using this sort of service.
What to be aware of
Some small business finance providers will have minimum transaction requirements for their service. They may also have other requirements, such as a minimum amount of sign-ups each month or a minimum credit amount via your business. Be sure to check all of these potential factors before submitting an application.
Some lenders may put the bulk of the fees and charges onto customers, where others may hold the merchant accountable for the expense of the service. Be wary that small business lenders may charge higher fees than some of the interest-free providers, as smaller businesses with less annual turnover pose higher risks to lenders.
3. Invoice financing
If your business is a B2B and you provide or could provide invoices to clients for your goods or services, you may benefit from invoice finance. Invoice finance is not traditionally a form of customer finance, but could potentially be used as such depending on your business and the services that you offer.
How does it work?
Invoice finance is typically a cash flow solution that allows businesses to unlock capital tied up in their unpaid invoices. You receive the invoice amount upfront from a third-party provider and your customer pays the financing company directly when the invoice is due. The invoice is used as security against the payment.
Some invoice financing companies offer the option to pursue payments themselves as well as provide insurance should the payment not be met, while others will leave the debt collection responsibilities to your business. Some invoice financing companies will run credit checks on your customers and others may not.
Some invoice finance providers offer customer finance solutions in which your customers can pay your costs or fees in monthly or weekly instalments. However, this will depend on the lender and some invoice financing companies might require full payment in a single instalment from your customers. Speak to your provider to see whether there is an option for you to offer your customers a monthly or weekly repayment plan.
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How much does it cost?
Invoice financing costs depend largely on your business's annual turnover, your credentials and your industry. Normally with invoice discounting, a portion of the unpaid invoice is withheld (10-30%) and a "discount fee" is applied. A discount fee works in the same way as bank interest: it is the cost charged for the lending service, calculated on a percentage of the invoice value. This fee is taken from the withheld amount of the invoice and the remaining money is transferred to the business.
However, if you were to use this method as a form of customer finance, you may be able to offset some of the costs by charging a surplus on your invoices to customers who do not wish to make an upfront payment. Some invoice financing companies for industries such as accounting and law transfer the interest payments to the client, who pays off the invoice balance in instalments. Check with your provider to see if it can offer this service.
What to be aware of
Check all of the legalities and speak with your provider directly before offering your customers finance through the medium of invoice financing.
4. In-house financing
You can also provide in-house financing for goods and services. To provide your own in-house credit to customers, you will need to gather the following information:
- Customer contact details (name, address, phone number, email)
- The ABN (if a business), business structure, details of partners/owners, details of directors and trustees
- Contact details for three or more supplier referees
- Signed confirmation that they understand your terms and conditions
- Their permission to conduct a credit check
This kind of finance can be time-consuming and risky for small businesses, and without a third-party provider, your business would not receive the payment for the transaction upfront.
Make sure you weigh up all of your options carefully before committing to a customer finance plan.
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