What is Retail Financing?

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

Retail financing is when retail businesses facilitate point-of-sale consumer credit or stage payment options to their customers who wish to make a purchase.

Retail financing gives customers options besides paying for the full cost of your product or service up front, putting it on their own credit cards, or lining up outside financing themselves.

Businesses offer it because it makes their offering more affordable. Customers can purchase on the spot, even if they don’t have sufficient credit available on their credit cards. It’s especially useful for impulse purchases – where customers didn’t line up their own financing in advance. 

Retail financing is often done at the point of sale – right at the sales table or the register.

In some cases, retailers use the financing itself as a profit center. This is common with auto manufacturers, for example, General Motors makes money on the financing, as well as on the sale of their cars themselves. And the Discover card was initially a way for Sears to sell products and make money on financing. 

For most small businesses, however, it’s impractical for them to roll out their own in-house finance company. Most don’t want to be out the cash flow while awaiting repayment. So it makes much more sense to contract with a retail finance company and outsource all the credit underwriting, administration, billing, and collections to someone for whom those are core competencies. 

The Characteristics of Retail Finance

Retail financing can be offered as a payment option without the need for an additional credit card terminal. This is because, in most cases, store terminals are equipped with point-of-sale software that includes these methods of payment.

In other words, a retail business does not need a physical credit administration system since modern technology allows finance operations to be conducted online.

Therefore, if you have a digital retail store, you can easily integrate an online credit administration system into your website as a financing option.

Retail Financing Helps You Serve All Credit Types

Retail customer finance companies will often serve a wider swathe of customers compared to bank lenders. Many people can’t qualify for a credit card. Or if they do, it may be a secured card or one with a very low spending limit.

In many industries, that doesn’t cover an average ticket size. If your customer needs a new roof, their bank card with a $600 limit isn’t going to do them much good. You need to offer additional financing options to help close the affordability gap.

The Difficulty with Traditional Lenders And Credit Facilities in Retail Financing

Many times, shop owners and retail sector merchants looking for a retail financing solution go to their own banks, and to traditional lenders like them. 

But these aren’t always the best choice for retailers looking to offer retail financing, for the following reasons: 

  • Tight, traditional credit standards. 
  • Long and tedious application and approval processes. 
  • Inflexible lending rates
  • Required terms are too short and payments are too high to make your products affordable
  • No industry specialization. A bank lender may not understand you or your customers as well as a lender who specializes in your business. 
  • No case-by-case underwriting or manual review of borderline applications.
Sara Hafeman

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