In an age where brands are struggling to stay relevant and capture a share of the market, anything can make a difference. One of those things is consumer financing—a type of consumer credit that lets your customers pay comfortably for large transactions.
Not everyone can afford to pay a hefty pile of cash upfront at the point of sale.
In addition to a lack of disposable income, there are other bills to pay and contingencies to consider.
Sure, credit cards can help to some extent, but even they can be limiting.
With consumer financing, you can provide a solution for all those problems.
If your understanding of the concept is a little blurry—keep reading. In this post, we’ll take you through everything you need to know about consumer financing and why you need to offer it.
Let’s get started.
What is Consumer Financing?
Consumer financing is a type of payment option that you can offer to your customers at checkout. It allows them to walk away with your product without having to pay the entire amount of the transaction upfront. Instead, they pay this amount in installments (usually monthly payments) over a defined period, with interest.
Depending on their financial circumstances, some customers might feel more comfortable paying for a product on a month-to-month basis (using small percentages of their incomes), as opposed to spending all or a large portion of their paychecks at once.
In a way, this financing option is similar to credit cards. However, it’s much more convenient and, at times, cheaper (we’ll dive into the key differences shortly).
A consumer finance program can open many doors for both a business and its customers.
This financing option isn’t an additional “barrier” or an administrational hurdle, but an opportunity to invite more customers to do business with you and capture a large(r) chunk of the market.
Consumer finance has been around for many decades in one form or the other.
Over the years, with the emergence of better merchant technology, the process has become far more streamlined and safe.
Back then, most business owners were reluctant to offer these financing programs due to difficulties in keeping up with the account-payables and the risks of non-payments and non-cooperation by the customers.
But today, everything has become easier. This brings us to the following question:
How is Consumer Financing Offered?
Nowadays, businesses offer consumer financing through a third-party entity—a financing company.
These financing companies act as intermediaries, offering their financial services to businesses.
They take care of everything, including:
- Looking after the application process and other administrative tasks
- Acquiring the payments from customers (which really isn’t the problem of the business)
- Managing the history of payments
All you have to do is to sit back, relax, and focus on the core aspects of your business and figure out ways to increase your conversion rate.
And in case you’re wondering—whenever someone makes a transaction using customer financing, you don’t suffer any losses or a financial setback.
The finance company that you’ve partnered with will pay you the complete amount upfront. At this point, you’re out of the picture, and the customer only has to deal with the company providing the financing solution.
Additionally, the financing company won’t charge you anything (except for maybe a small one-time fee—this depends on the service provider). They earn a profit by charging a fee to your customers and earning from the interest they pay.
In some way, the mechanism is the same as a typical financing loan, but much faster and “leaner.”
How is Consumer Financing Different from Credit Cards?
As mentioned earlier, consumer financing is similar to credit cards in that they’re both types of customer credit.
Credit cards allow consumers to pay for small or medium level purchases. However, there are certain transaction limits involved.
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 tiers. Some can offer up to five. Each tier has a different “spending limit.” The higher the tier, the greater that limit.
The customer pays back the bank/institution that issued the card, with interest.
With consumer finance, however, there’s no spending limit. A customer can purchase anything, from a mini-fridge to the latest model of the iPhone—without limitations of any kind.
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.
The financing company will then run a quick credit check to see if they're eligible for the financing or, in other words, able to pay the amount back.
If the credit approval goes through, the customer is then asked to pick a payment plan and pay a percentage of the total price upfront, completing the transaction.
To sum it up:
- Consumer financing is suitable for hefty transactions, whereas credit cards are (usually) meant for smaller payments.
- Credit cards offer more control over the surface. However, customer financing is more predictable and defined.
Additionally, in most cases, the interest rates for consumer financing programs are comparatively lower than credit cards, which is a win for your customers.
What Type of Businesses Shoulder Offer Consumer Financing?
This mode of sales financing is meant for retailers, especially eCommerce businesses.
A customer could use consumer financing to buy a smartphone, a new television, a refrigerator, or even car seat covers.
There’s financing for almost everything. For instance, did you know furniture consumer financing was a thing?
In the end, there’s no rulebook defining who can and cannot offer this financing option. However, it doesn’t make any sense for certain businesses to go for this route (such as a restaurant or catering service).
Why You Should Offer a Consumer Financing Program
As highlighted earlier, offering a consumer finance program is a win-win for everyone.
As a business owner, you get to enjoy a significant competitive edge (or meet a bare minimum standard, depending on your niche and where you’re based).
Furthermore, your customers will love you for it.
Let’s discuss everything from both perspectives.
Benefits for Your Business
There are a lot of ways you can benefit from offering a consumer financing option.
Considering everything discussed so far, whether you’re a small business or a scaling retailer, there’s no reason why you shouldn’t be offering this financing option.
Here are a few reasons to get you started:
- You Can Capture More Customers and Increase Sales
Customers often shy away from making hefty purchases. The reasons could vary.
However, the underlying mindset is the same—they don’t want to spend so much money upfront.
As a result, they delay the purchase (and in some cases, never really buy those products).
Keeping that in mind, imagine how many potential customers you’ve lost so far just because they weren’t able to pay you upfront.
By offering customer financing, you can overcome this hurdle and open the gates for a larger chunk of the market.
Just because someone’s credit card isn’t allowing them to spend a certain amount of money and they don’t have enough in savings, doesn’t mean that they don’t deserve to do business with you.
This is your opportunity to capture that interesting segment of the market and send your sales through the roof.
- It Will Give You a Competitive Edge
At the very beginning of this article, we highlighted how, in a competitive market, every little thing counts.
Businesses are no longer selling just their products to their customers. Instead, they’re delivering an all-around experience.
Everything, from the product to the customer service, helps create a perception about the brand and adds to the competitive advantage.
The number of available payment options does, too.
Keeping all that in mind, offering consumer finance could give you a significant edge over your competitors.
- It Will Help Build Customer Loyalty
Finally, offering the freedom for financing to your customers can help build loyalty.
Your customers will view your brand as a venture that’s open to a wide range of segments and one that doesn’t discriminate.
Eventually, as they continue to buy your products (and everything else is fine), they’ll become loyal patrons, and even help attract new customers to your brand through word-of-mouth.
There’s a lot more that goes into establishing loyalty and creating this level of brand affinity, but giving financial freedom to your customers can be a good start.
Benefits for Your Customers
Here’s how offering the option of consumer financing can help your customers:
- An Additional Payment Option
Let’s get the most obvious, yet the most significant advantage out of the way first.
Customer financing gives your consumers an additional mode of payment.
Having multiple options can help them make better credit decisions. By evaluating their options, they’ll have greater flexibility in picking the right one based on their present financial circumstances.
Some of them might not be aware of the concept of consumer financing, and you could very well be the first brand to deliver that first-time experience.
- Ability to Purchase More
The rise in rent and other bills can leave some people with barely enough disposable income to put proper food on the table by the end of the month.
And the downward-spiraling economy due to the COVID-19 pandemic isn’t helping.
In times like these, spending a few grand upfront on appliances, furniture, or anything else could be a distant dream for thousands of people.
However, with the freedom of financing, a large chunk of those people could afford to pay for those needs.
- A Simple Way of Paying for Transactions
Another great thing about consumer financing is that it’s incredibly simple.
While simplicity alone is no longer anything special, when it is tied to financial freedom and flexibility, consumer financing seems too good to be true (from the perspective of your customers).
All it (usually) takes for a person to checkout with this mode of payment is to go through a small and quick application process right there on the retailer’s website/store.
The actual process takes almost as long as making a transaction with a credit card. Customers can find out if they are approved (or denied) for financing within a few minutes, and walk away with the product in their hands.
Start Making Things Easier for Your Customers
At the end of the day, everything boils down to one simple truth:
The more barriers you remove for your customers, the better your business will perform in the long-run.