Consumer Financing for Merchants: Small Business Guide

Updated on September 28th, 2021
Consumer Financing for Merchants: Small Business Guide

For business owners who provide pricier items and services such as home improvement or dental care, it can be frustrating how many customers end up canceling orders. Days of negotiations go down the drain, most often because the customers realize they can't pay with cash.

They remember the debt looming over their heads and decide it's better to save than spend money. And you can't blame them. According to the Federal Reserve, the total credit card debt for the second quarter of 2021 was $787 billion.

To grow your business, you need to create multiple and flexible financing options for your customers. By offering financing options, you can bring in new customers and increase your annual revenue.

But you need to do it right. While consumer financing is a powerful tool for any merchant, if you fail, it can end up creating an unnecessary financial weight and spoil all your short and long-term payment plans.

This guide will walk you through how to offer consumer financing in a way that will make your customers happy and your small business flourish.

What is Customer Financing?

Although many compare customer financing to a credit card, there are vital differences. With customer financing, customers can buy your goods or services. But instead of paying the entire cost at once, they split the cost into monthly payments. Same as with credit cards, you get the whole amount, and the customer gets their goods or services instantly.

Although you can offer financing on your own, small businesses typically enroll a financing provider. The main reason is that a merchant doesn't usually have the required capital to provide such services. Additionally, it's crucial to know complex legal and financial regulations since even a minor slip can cause unnecessary legal issues and fees.

Besides having the monthly payment, the customer also pays interest rates, while in some cases, the merchant also pays a fee for each successful transaction. Keep in mind that this depends on the provider offering consumer financing.

The main difference between consumer financing solutions and credit cards is that a credit card typically has a limit. That limit usually disables customers from buying high-tier items and services. But with, consumer financing, there isn't a general cap on the loan. Nevertheless, the financing platform checks the customer's credit score and credit history during the application process.

Finally, consumers aren't the ones looking for a financing provider. Instead, you as a merchant offer consumer financing to customers either through a third-party provider or yourself.

Benefits of Consumer Financing for Merchants

First, it's essential to understand the general advantages. Small businesses usually reap multiple benefits by providing flexible financing programs. Although this depends on the financing platform as well, we will cover picking the right provider later.

Increase Sales

According to Bankrate, only 4 out of every 10 Americans can't afford to spend $1,000 at once. That's roughly 39%.

Roughly speaking, you're limiting yourself to less than 50% of the possible consumer base if you’re selling anything beyond that price point. Furthermore, depending on the urgency of your service, you have to consider how inclined the customer is to buy, bringing your market share to even lower lows.

But by offering customer financing solutions, you open the doors to a whole new customer group. That group is people who technically can afford your goods, but not in cash.

Naturally, you won't recognize a customer like that when they walk into your store or contact you via your website chat. This begs the question. How many customers do you think you lost because you thought they couldn't afford the good or service? When in reality, all they needed was the financing option to pay in monthly payments.

Brand Loyalty & Customer Retention

As a small business, what do you think it's cheaper to get? A new customer or a returning customer. Also, which of the two is more likely to buy?

It might not surprise you that research shows that the likelihood of selling to a returning customer is 60-70%, while the chance falls drastically for new customers, between 5% to 20%. But, what's surprising is that according to the same statistics, it's seven times more expensive to get a new customer than to get a returning one.

Look back at your last marketing or advertising campaign you did to get new customers. How much did it cost? Anywhere between $1,000 to well over $50,000. And how much did it cost to retain a satisfied customer? Probably zero. They came back because you offer quality service.

Although we need to consider the reluctant customer, let's focus on the happy consumer for now. If your service is great and even better, if it stands out amongst the competition, you can boost your retention rate.

Customer financing is another tool to help you do that. It's like another fantastic gadget in Batman's utility belt. A gadget you want to have.

Advertising Tool

Offering consumer financing is a great way to build brand awareness. Although it shouldn't be your go-to option, you should clarify that customers can get consumer financing if they wish.

Consumer financing can attract new customers to your business, especially if you partner with a customer financing business that has a great reputation with customers.

Consumer financing is also an affordable advertising option with low financial risk since you can advertise online on your website. Finance solutions aren't common, so you can quickly get new customers by offering consumer solutions in your specific business niche.

Increase Referral Rates & Customer Acquisition

Another great thing about happy customers is that they love to spread the word about the great deal they found. Look at from psychologically. If a customer walks out satisfied, they feel that they are the ones who discovered you, although it might be otherwise. In the grand scheme, it doesn't matter.

But because the customer thinks like that, they will want to brag to their friends and family. Naturally, it's highly possible that at least one person also needs but can't afford something that's well over $1,000.

The returning customer increases sales by coming back, but they also are a free megaphone that brings in fresh customers.

For many people, it's not the credit score or interest rates that are the problem, but the immediacy. Lack of multiple payment options won't hurt your business directly, but it instantly shut down many opportunities.

How to Offer Financing to Customers

We briefly mentioned that business owners have two options: offering financing by themselves or through third-party financing providers.

The first option is to run a credit check, offer financing, and collect payments by yourself. However, this option doesn't mash well timewise with your business. Think about it. On top of all the responsibilities you have when running a business, you must handle a complex financing program.

Additionally, there are also legal responsibilities we also mentioned that you can check here.

The second, and usually the better option, is to find a third-party company that will offer financing to your consumers—that way, the company takes over doing every credit check and is responsible for collecting payments. Meaning, not only does your responsibility end with selling, but you also get the payment instantly and stay away from legal responsibilities.

Here's a quick rundown of how offering financing options might look like in three simple steps.

Step #1: Consumer Financing Awareness

Like every typical sale, it usually starts with the customer entering your store or contacting you about the service or item you offer. The customer reveals that they can't purchase because they can't afford the full price, even though they want or need the product. You might even offer a discount, but it doesn't help.

This is the crucial moment in offering financing options. If you advertise flexible payment options on your website, a customer might arrive asking about payment options directly. But let's say the consumer isn't aware of the possibility.

It's this moment where you make the customer aware of the possibility of applying for customer financing. When explaining consumer financing, here are key elements you should mention:

  • Let the consumer know that they don't need to look for a provider. You already have a financing partner.
  • Let them know that the application process is straightforward and they can do it online. (It's always better to go with providers that have the online option.)
  • Let them know that the loan amount depends on their credit score but that there's no limit like with credit cards and that approval rates are higher. (Inform yourself about additional details with your provider.)

People usually aren't aware of options for purchases, so it's vital to inform them.

Step #2: Consumer Financing Approval

The next step is for the customer to apply through the company's website or platform and wait for the approval. In some cases, customers might need to create an account.

Customers can't purchase until financing companies approve the loan. This is the waiting process until the company does the credit check, forwards the loan, and usually takes several days.

Often, the customer might contact you to check on the customer financing progress. It is wise to inform your customers upfront how you're not the one offering consumer financing. But you should still be open to help customers. An excellent financing business knows how to communicate both with you and your customers, so it's vital to partner with the right one.

Step #3: Finalizing the Purchase

If the company approves consumer financing, you as the merchant get the full payment right away, and customers instantly get the product or service. Technically, this is where your job ends. But for the sake of staying informed, you should know the whole process.

Providers offering financing solutions determine the payment schedule for their financial programs. Usually, it's monthly payments, but the amount varies per each specific case. After, customers pay the provider the predetermined monthly payment plus interest rates.

Additionally, in some cases, customers might have to pay a certain amount upfront, depending on the financing program.

How companies that offer financing programs handle customers late with monthly payments depends on the company. Typically it includes multiple fees, such as the late fee, but if customers are regular with their monthly payments, the risk is practically non-existent.

Finding the Right Consumer Financing Company

Finding the best consumer financing company can be challenging. Usually, you want to avoid financing companies that offer general consumer financing. Depending on the business, business owners should partner with financing businesses that provide specialized customer financing.

Specialized customer financing means that the corporation tailors all of its financing options to your business. If you're a car merchant, you want to deal with companies that know how to tailor payment plans for car purchases. If you're in the home improvement business, you want a customer financing company that has experience in that specific niche.

Furthermore, remember that it's not all about you. Some consumer financing businesses might benefit you dramatically, but you don't want your revenue to break on your customers' backs. Although you might experience a slight sales boost and some other benefits, long-term, it can put you at risk by creating a bad reputation.

Instead, you want to partner with customer financing businesses with an affordable financing program and fair interest rates for your consumers.

Additionally, you want to find a financing business that has quality communication. Companies that offer financing need to communicate on two fronts: with you and your consumers. If it turns out that they can't share progress, fees, and possible issues to both sides, it's better to find more experienced providers.

Although consumer financing comes with benefits for small businesses, you should remember that consumer financing should serve both you and your customers. Naturally, companies that offer financing need to profit as well. Overall, it's a dance for three from which every party should walk out happy.

Consumer Financing with Time Investment

Time Investment company (TIC) helps small businesses across the country to offer top-quality financing programs with low fees and quick applications. TIC has a 20-year of experience with successfully handling consumer financing for companies from many different niches.

Thanks to the experience, TIC has a powerful financing formula that benefits both small companies and consumers. Here's what makes TIC stand out:

  • Instant payment on service order: When the customer confirms the purchase of your good or services, TIC releases the total amount instantly. No need to wait to get the capital in your pocket.
  • Genuine flexibility: Many financing companies stick to one financing program that's safe for them. TIC makes an effort to work with you and create two things: a smooth business for you and payment liberty for your customers.
  • Intuitive management system: Businesses get access to the latest online platform that makes it easy to check scheduled payments and the overall loan progress.

To this date, TIC financed over $755M in loans for businesses across the US and different niches. A vital element to our ongoing success is our genuine customer-oriented approach to our business clients and each account.

Partner with Time Investment Today

It's not hard to find a consumer financing business. All you have to do is a quick Google search, and you'll find yourself on their website in a second.

But, it can be difficult and time-consuming finding a business with the right profile, ethical objectives, and customers' needs in mind. Only a couple of them know how to sync up with what you're looking for, and TIC is one of them.

No matter if you're thinking of starting consumer financing or you're not happy with the current provider, feel free to get in touch for a free strategic call on how TIC can help improve financing for your business.

Sara Hafeman
Sara Hafeman

With years of experience in the consumer financing industry, Sara Hafeman currently leads marketing and partner development at Time Investment.