What is Consumer Financing?

Updated on April 1st, 2022
What is Consumer Financing?

Consumer financing means giving your customers a way to pay for goods and services over time, rather than charging the full price upfront.

Businesses do this because it makes their offerings more affordable, overcomes the price objection, closes more sales, and boosts customer loyalty.

Many customers wince at the thought of paying the full price for a high-dollar item all at once. They are much more likely to purchase if they can make affordable payments over time. 

Consumer financing allows contractors and sellers to do just that. 

Some merchants offer ‘in-house’ financing. This means that it’s the seller extending the credit themselves. More commonly, merchants contract with a third-party finance company such as Time Investment Company, which pays the merchant at the time of sale, and then collects payment from the customer over time. 

How Is Offering Customer Financing Different from Credit Card Financing? 

Accepting credit cards is another convenient way to allow customers to finance their transactions, and pay for goods and services over time, rather than all at once. 

As mentioned earlier, consumer financing is similar to credit cards in that they’re both types of customer credit. Credit cards are a convenient way for consumers to pay for small- or medium-sized purchases. However, there are certain transaction limits involved.

How Credit Cards Work

The amount you can spend with a credit card will depend on the type (or the tier, if you will) of credit card you have. This depends on the credit score of the cardholder.

Most credit card companies offer three to five tiers, with approvals for each tier dependent on the creditworthiness and stated income of the customer. Each tier has a different “spending limit.” The higher the tier, the greater that limit.

That is not to say that the financing platforms don’t check the customer’s background and credit history. At the point of sale, the customer will be asked to provide certain information, such as their full name, phone number, social security number, monthly income, etc. 

Credit Card Financing Disadvantages

But from the merchant perspective, credit cards have some significant downsides, as well: Merchant discount rates can be very expensive, especially on narrow margins.

Also, with credit card transactions, the seller is vulnerable to chargebacks. If the customer is unhappy for any reason – rightly or wrongly – the customer could open a dispute with the credit card issuer, who may reverse the charges, and leave your business hanging.

Moreover, many consumer finance companies are willing to take on much larger transactions than credit card issuers. With credit cards, most customers are limited to a few hundred or a few thousand dollars. And by the time your salesperson gets to the customer, they may have very little headroom left on those credit cards.

Meanwhile, interest rates on credit cards tend to be quite high: The average credit card interest rate for new card offers is now 16.2% as of this writing and is expected to go up from here. Consumer finance companies can usually (but not always) offer a much better interest rate.

Boost Customer Loyalty By Offering Monthly Payments

Offering a consumer financing option of your own, in house, or via a third-party financing company, allows you to stay in control, minimize your vulnerability to chargebacks, reduce your transaction expenses, and often give you a way to offer better terms to your customer than they can get from their own credit card issuer.

While some merchants do offer “in-house” financing, it can be a headache to keep track of customer accounts and do the collections every month. Some merchants don’t want to hire accounts receivable employees to make collection calls. For most small businesses, these just aren't cost-effective customer financing solutions.

In practice, most small businesses prefer to use a third-party lender to handle collections. That way, all they have to worry about is keeping the customer happy and focusing on their core competencies. This increases customer purchasing power, encourages repeat business, helps increase sales, generates bigger sales,

Offer Financing Solutions

By using a third-party financing company, business owners can unload the non-core accounts receivable and collections function to someone else. Customers get fast credit approval. Business owners get paid upfront (or within a day or two of the credit decision and confirmed sale) and they can focus on their core competencies. The customer generally makes convenient equal monthly payments on  these installment loans,

With a third-party consumer finance lender, offering financing isn’t an additional “barrier” or an administrational hurdle, but an opportunity to invite more customers to do business with you, and help you capture a large(r) chunk of the market.

How to Offer Customer Financing

As a business owner, you can offer attractive customer financing options year-round. Or you can tailor your financing program via promotional financing and offer special deals to drive up sales and give customers more purchasing power. It all depends on your business model.

Partnering with Time Investment Company to provide affordable financing for your customers is easy: To get started, you can fill out a brief information form on our website. Tell us a little bit about your business, and one of our lending professionals will contact you.


Mike Farrell

With over 30 years of experience in the financial industry, Mike Farrell currently leads operations at Time Investment Company.