Customer financing as a market phenomenon is growing at an enormous speed in niches ranging from auto financing to retail and furniture stores to medical and dental. Here’s why it’s important to take note of this trend and learn how you can use it to your advantage.
Customer financing has been around for centuries. As far back as 1800, merchants used credit coins and charge plates to give credit to local farmers and ranchers. But only recently did the technology catch up with the level of globalization. This concept has gone through a major transformation in today’s digital age that grants almost instant loan issuing and risk evaluation and easy servicing, collection, and reporting.
The number of businesses that sell products and services that are too expensive to buy in one transaction is immense. Retail stores, dental and medical clinics, car dealerships, and many more can benefit from using customer financing both as a monetization model and marketing tool.
The technological barrier and expenses of becoming the lender for your customers dropped drastically. Yet, if we simply look around in the closest mall, we can see that the number of SMEs that have adjusted their business models is still very modest compared to the overall number of operations that could use in-house financing.
This allows various types of businesses to also use in-house financing as a competitive advantage, which would help them stand out in the market.
There’s an awesome infographic by Fit Small Business explaining how customer financing works in simple terms:
Source: Fit Small Business
The steps of customer financing are:
- You let customer know about the customer financing option
- Customer applies for financing
- Customer gets approved
- Customer gets offered promotional rates
- Customer pays for products
- Customer receives product and makes monthly payments
Learn how customer financing helps businesses grow.
Why Customer Financing Is an Important Trend in Crediting
What choices do customers have when they want to buy something and don’t have the money required to pay for it at once?
- Get a loan from a bank
- Borrow money from someone they know
- Put aside cash until they have enough
- Get a quick loan from the provider of the product or service they want to purchase
Given that the loan-issuing process you can provide your customer is safe and quick, the last option is a win-win.
You get to convert customers on the spot, receive additional profit from the interest, and tie them to your business for a couple of months for a possible upsale, among other benefits.
In the last five years or so, financial technology has gone through a major evolutionary leap. Bank-grade platforms and borrower evaluation models, which were only accessible to large-scale banks, are now within reach for anyone willing to sell credit products. Inevitably, this leads to large volumes of business owners implementing consumer financing programs into their operations.
Some business are still on the fence about the whole in-house financing concept because they are used to thinking that the whole process may require too much of their limited resources, that the risks of non-return may be too high, and that they won’t be able to even out the changes in the cash flow that come with the new monetization model, among other excuses.
However, for many businesses, in-house financing is an incredible opportunity that is just sitting there ready for the taking. The sophistication of the lending systems, extent of automation, and affordability of the software allow for quick deployment, low maintenance costs and resources requirements, and even lower risks for the loan issuer.
As the user experience is key to loyalty in the modern digital world, the most important thing is that buying becomes even easier than it used to be with regular e-commerce payment modules.
For example, clothes shop Everlane offers customers the option of paying for a product in smaller chunks over time rather than the full amount up front.
For The Form Bag, Everlane gives its customers the option of four payments of $58.75 rather than paying a one-time expensive price of $235. This makes it easier for the customer to justify making a purchase.
Shoppers appreciate customer financing options.
How Your Business Can Benefit From an In-House Financing Program
With in-house financing, you can eliminate the middleman (bank) and give the loan to your customers yourself quickly and safely, weeding out the vast majority of those who aren’t going to return the money on time.
The filtering can be done by means of an advanced lending automation system that uses traditional and alternative borrower evaluation approaches and data sources to make sure you’re crediting the right people.
The system can take care of servicing and collecting with little to no help from your staff after the loan is safely issued.
Of course, it wouldn’t be fair to say that every business needs an in-house financing program, but any business selling products or services that may be too expensive to buy in one transaction should at least consider it, research the market, and take a couple of tools such as TurnKey Lender for a free trial.
On a higher level, the key benefits of customer financing are:
- Better experience for customers
- Easier and faster buying decisions
- Increased customer loyalty
- Higher customer loan-to-value ratio (LTV)
- Higher chance to get repeat business
- Increased average order value
To put it in monetary values, recently there has been plenty of research devoted to the effect of customer financing on business; most show that customer financing is well worth the effort:
- The average order size for an SME may increase by up to 120% upon adding an in-house financing option.
- Customer financing helps increase incremental sales by 17%.
- About 93% of customers will use consumer credit again after trying it once.
- Businesses in the UK are losing out on £25 billion a year due to lack of customer financing.
How Your Business Can Start Offering Loans
Launching an in-house financing program has never been easier.
The two main approaches to offering customer financing are to integrate with a point-of-sale financing company or to get an all-in-one lending platform to offer the credit products yourself.
With the first model, in-house financing becomes a marketing tool, and the third-party company gets to deal with collection and servicing of the loans, but at the same time, it is the one reaping all the rewards.
The latter option requires a bit more effort from the business owner, but you don’t involve the third wheel in your dealings with customers and keep the interest and fees the customer pays on your products or services.
Keep in mind, though, that no matter what model you choose, it’s extremely important for an SME to take care of the regulatory compliance with the local governing bodies. They differ for each jurisdiction, so there’s no one-size-fits-all formula here.
Modern lending automation platforms come with country-specific compliance and reporting functionality built-in, so that shouldn’t be too much trouble. Yet as a business owner, you’ll need to consult with lawyers specializing in lending in your country to avoid any legal issues.
Succeed With Customer Financing
Customer financing makes buying decisions easier for the client and allows the business to convert more loyal customers in the process.
Offering in-house financing used to be a complex and costly procedure, but thanks to automation and the development of financial technology, launching an in-house financing program is much easier than it used to be. Of course, it still requires some effort and a few steps to get it done right, but often it’s well worth the trouble.
Customer financing can become an outstanding business growth vehicle for an SME, both as a marketing strategy and as a monetization channel to drive growth. And the truth is that soon it’s going to become the new norm in many markets.
So, right now is the perfect time to begin customer financing so you can stand out from competitors.