Consumer financing is a broad term that describes lending products customers use to purchase goods or services by using credit, allowing them to make payments over time. Interest rates and credit limits are generally based on the customer’s creditworthiness which can be determined by a variety of factors such credit score and debt to income ratio. As new options for financing have entered the market, it is becoming increasingly popular for businesses to take advantage of the benefit of offering financing options to their customers.
In this guide, we will explore the different types of customer financing, the benefits of offering customer financing options, and best practices for implementing customer financing.
Types of Customer Financing
There are several different types of customer financing, each with its own unique features and benefits.
Revolving Credit.
Revolving credit is a type of credit line that allows customers to borrow up to a certain limit and make payments over time. This type of financing is used for credit cards and home equity lines of credit. They allow the customer to draw funds from their account as long as they don’t exceed the credit limit. One benefit of revolving credit is that customers can use it repeatedly.
Installment Loans.
These are loans that customers repay in regular payments, usually over a period of several months or years, depending on the loan amount. These loans are often used for large purchases such as cars or appliances and come with a fixed APR. This lets customers know exactly how much they will need to pay each month, which makes it easier to budget for the loan.
Leasing.
This is a financing option that enables customers to obtain the use of a product or service for a specific period, usually several years, by making regular payments. At the end of the lease term, the borrower usually has the option to purchase the product, return it to the lessor, or extend the lease. This option is frequently employed for expensive items such as cars and equipment. An advantage of leasing is that customers are not responsible for maintaining or fixing the item, which is typically the duty of the lessor.
Rent-to-Own.
This enables customers to rent a product or service for a specified period and then have the option to buy it at the end of the rental period. This option is commonly used for items such as furniture and appliances. Customers have the opportunity to test the product before making a commitment to purchase it. Often the terms leasing and rent-to-own are used interchangeably.
However, while rent-to-own offers the borrower an option to buy, a lease agreement can include conditions that obligate the borrower to purchase the product at the end of the lease.
Benefits of Offering Customer Financing
Offering customer financing options can bring many advantages to businesses.
Increased Sales.
By offering financing options, businesses can make it easier for customers to purchase goods and services, which can lead to increased sales.
Enhanced Customer Loyalty.
Customers who are able to finance their purchases are more likely to be loyal to the business and return for future purchases.
Improved Cash Flow.
Providing financing options can improve cash flow for businesses by allowing them to receive payment for their product or services in full.
Reduced Risk.
By partnering with a lender, businesses can reduce the risk of non-payment by having the lender assume the credit risk.
How to Implement Customer Financing
Implementing customer financing can be done in a few different ways, depending on the needs of the business.
Partnering with a Lender.
One way to implement customer financing is to partner with a lender who can provide financing options to customers. This can be done by working with a bank, credit union, or alternative lender.
Offering In-House Financing.
This can be done by setting up a line of credit for customers or by offering a layaway program. This is a good option for businesses that don’t want to partner with an outside lender.
Using a Third-Party Financing Platform.
Third-party financing platforms can be advantageous for businesses in several ways. They often have a variety of lenders and financing products available, allowing businesses to customize options for their customers. The onboarding process with these companies is often quick and the platforms are designed to be easy to use.
Best Practices for Customer Financing
To ensure that customer financing is beneficial for both the business and their customers, it is important to follow best practices.
Clear and Transparent Terms.
The terms of the financing should be clear and transparent so that customers understand exactly what they are agreeing to. This includes the interest rate, repayment schedule, and any fees or penalties.
Flexible Repayment Options,
Offering flexible repayment options, such as the ability to make extra payments or change the repayment schedule, can make financing more accessible to customers.
Regular Communication with Customers.
Communicating regularly with customers, including sending reminders about upcoming payments, can help to ensure that payments are made on time. This applies to businesses offering in-house financing. If a business chooses to partner with a lender or third-party financing platform, repayments are generally handled by the creditor or servicer of the loan.
Providing Education and Resources.
Supplying customers with education and resources, such as financial literacy resources, can help them to make informed decisions about financing and budgeting for their purchases.
Offering customer financing options can bring many benefits to businesses, including increased sales, increased customer loyalty, improved cash flow, and reduced risk. To successfully implement customer financing, it is important to understand the options available and determine which solution will work best for the business.
By following best practices, such as clear and transparent terms, flexible repayment options, and regular communication with customers, businesses can ensure that customer financing is beneficial for both the business and the customer. Overall, customer financing is a great lending solution that can help businesses to grow and succeed.
