Customer financing 101: how to offer financing to customers

Customer financing basics

What is customer financing?

Customer financing is an arrangement where a financing provider either loans a customer the amount they need to cover their purchase or pays for it on their behalf. The customer then makes payments over time to that provider until their debt has been paid in full or the terms of their agreement have been satisfied.

While larger retailers sometimes work with banks to establish their own in-store financing programs, that isn’t always an option for small businesses. That’s where third-party financing providers come in. You can partner with an established provider to give your customers more convenient payment options.  This strategy has proven profitable for small business owners nationwide.

How does customer financing work?

These steps may vary depending on the provider you work with, but this is the general process:

1. A customer is ready to check out and wants to use your financing option.
2. They apply (typically online) using their smartphone or an in-store computer.
3. If they’re approved, the provider informs them of their maximum amount along with checkout instructions.
4. The customer completes their transaction with an in-store representative and takes home the financed merchandise.
5. The customer makes regular payments over time to the financing provider until their account is paid in full.

Types of customer financing

Primary financing covers traditional loans, credit cards, and other financing options that rely mainly on customers’ credit scores to determine whether they’re approved or not. Primary financing providers collect interest on loaned amounts. Interest rates are usually lower for those with good to excellent credit. Those with fair to bad credit, or no credit at all, are unlikely to qualify for primary financing.

Secondary financing includes lease-to-own and loan options that are open to all credit types. Lease-to-own financing providers, like Snap Finance, consider more than just customers’ credit scores when making approval decisions.

Benefits of offering customer financing

Increase order values

Data shows that order size increases by 15% on average when businesses start offering customer financing. Bigger orders mean more bottom-line revenue for your business. It all comes back to customer purchasing power. A customer with financing in hand feels more confident buying exactly what they want instead of settling for something cheaper that’s not quite what they want.

Close more sales

Every salesperson can remember a time they lost a sale over the initial cost being a customer dealbreaker. Offering customer financing is an easy way to save those sales and boost your overall business. A customer who can’t afford a large single payment may still be able to make smaller payments over time. This “buy now, pay later” option can become one of the strongest sales tools in your inventory.

Stress less

Working with a third-party financing provider is much simpler and easier rather than putting together an in-house solution. It lets you avoid the headache of managing customer financing accounts and eliminates the worry of customer nonpayment. It depends on your financing provider, but most companies pay you up front when a customer finances a purchase and take on the full responsibility of collecting their payments. You’re left with more time and energy to focus on your customers and your business’s success.

What else to consider when choosing a customer financing partner

Nearly all customer financing providers charge a fee for their services. Before signing up with a specific provider, you need to find out what costs exist, how they’ll impact you, and if they’re worth it.
Some providers charge a flat monthly or yearly fee. Others take their fee as a small percentage of each financed sale. What’s best for you will depend on your expected amount of financed business and the proposed fee percentage. It’s also a good idea to ask about additional startup costs before signing any paperwork.

If your provider claims to have no merchant fees, then the cost will most likely be passed on to your customers. If those costs are too high, it could keep shoppers from financing at all, which helps no one. It’s important to choose a financing partner with reasonable costs.

Not all financing companies are the same. Some meet small business needs better than others. Use the following checklist when evaluating a financing provider for your small business:

• No minimum sales threshold
• No long-term contracts needed
• Simple application and approval process for customers
• No hardware or equipment requirements
• No more than 5% cut taken from each financed sale
• Customer non-payment does not affect revenue

In addition to these criteria, it’s also smart to ask a potential financing firm some important questions. How long have they been in business? How many small businesses have they worked with in the past? What interest rates or fees do they charge customers? Do they allow you to offer customers promotional offers and special rates?

Last but not least, think of how well the provider will meet your customers’ needs. Will your customers qualify for the type of financing they provide? How long does the application process take? Is it simple and easy to understand? Considering the answers to these questions will help you make a smart and informed decision that will pay dividends for your business in the future.

Looking for customer financing solution? Snap’s easy lease-to-own financing can help your customers get what they need — all credit backgrounds welcome! Our merchant partners love what we bring to the table. Click here to learn more about what we can do for your business!