Customer Financing: What It Is and How to Offer It

Customer financing can encourage bigger and more frequent purchases and attract more buyers — but the question is how to offer it in a cost-effective way. Below, we’ll break down how the process works, how to get started and alternatives that may be a better fit for your business.

What is customer financing?

When you offer customer financing, you’re giving your patrons the option to pay for their purchases over time. Customer financing plans come in many forms, from simple credit cards to full installment loans. You can manage these finance options yourself or partner with a third-party finance company to do the work.

By stretching out payments, consumer financing makes your products and services more affordable. This can help secure new customers and encourage larger purchases.

Types of customer financing

Customer financing for small business falls into two categories: in-house programs you manage yourself and programs offered by third-party financing companies.

In-house customer financing

Key features:

• You set the credit terms (loan size, interest rate, payback period)
• You handle customer prequalification and credit checks
• You manage payment collections and bad debt risk
• You only receive cash when customers make their payments

When offering in-house retail financing for customers, you take on full responsibility for the program. You’ll have administrative expenses for staff, training and accounting software to track accounts receivable and collections. Your own cash receipts will be delayed and put at risk if customers don’t pay.

Third-party customer financing

Key features:

• Provider handles credit checks and customer approval.
• Provider handles debt collection.
• You’re paid up front.
• Typically, you’ll pay fees for this service.

Many companies offer consumer financing for merchants. Services range from basic credit card processing to full loan packages. There are big differences in fee structure, maximum financing amounts, industries and geographic locations served. Choosing the right provider to work with is an important part of managing your business finances.

Pros and cons of customer financing

How to offer financing to customers

Deciding what type of consumer financing to offer can feel complicated. First, think about whether you can afford the administrative expense, bad debt risk and delayed cash flows that come with an in-house plan, or whether you should focus on third-party partners.

With third-party providers, look for those that fit your business in terms of transaction size, customer creditworthiness and integration with your sales platform. Also compare total cost including startup fees. Here are a few examples:

PayPal

Paypal offers buy now/pay later programs for purchases from $30 to $10,000 in size, to be repaid over six weeks to 24 months. The business owner gets paid at the time of the purchase regardless of when the customer makes payments. Paypal currently is available in over 200 countries.

You must establish a Paypal Business Account and sign up for Paypal Checkout (which is already integrated with many ecommerce platforms to save setup time). Your transaction cost varies depending on country and transaction mode (online, physical credit card or QR code); current fees range from 2.29% to 3.49% of transaction value plus a fixed 9 to 49 cents per transaction.

ViaBill

ViaBill offers buy now, pay later customer financing for purchases up to $1,500 to be repaid over four to 24 months. You receive payment upfront regardless of the repayment schedule.

ViaBill is currently integrated with a few ecommerce platforms and is available in three countries (USA, Denmark and Spain.) The merchant transaction fee is currently 2.9% of the value plus a fixed 30 cents per transaction.

Synchrony

Synchrony offers three types of third-party customer financing solutions: credit cards issued under your own company’s name (called “store cards”), Synchrony-branded home and auto care credit cards and installment loans made directly to your customers.

Synchrony handles the customer-financing relationship while paying you in full up front. The loan or credit card maximum is based on each customer’s credit history. If you offer one of the credit card options, Synchrony will charge you merchant processing fees for credit card transactions.

Wells Fargo

Wells Fargo offers customer financing to small businesses under its Retail Services Program. It will either provide a customer payment platform or integrate with your existing one. Available financing options depend on your business — for example, home furnishings companies tend to have large transaction sizes, so Wells Fargo offers consumer loans with fast credit applications.

For retailers with lower transaction sizes such as apparel, you’ll have access to credit cards branded with your own company’s name. Wells Fargo will charge you credit card processing fees that currently range from 2.2% to 3.4% of each transaction, plus a 15 cent flat fee and a monthly fee of $10 to $15 per sales location. They could charge additional fees based on the devices or apps you use for transactions, so it’s important to discuss your particular needs with a representative to get the full picture.

Financeit

Financeit is a lender specializing in large retail transactions up to $100,000. Their service is tailored to merchants in businesses like home improvement and vehicle sales where customer financing can make the difference in closing a sale.

Financeit provides you with digital tools like payment calculators to integrate loan quotes into your selling process. They also give you flexibility on the credit terms you can offer, such as deferred payments, 0% initial interest and interest rate buy-downs.

Once the credit is approved, Financeit remits 100% of the purchase value to you, without charging transaction or other fees.

Snap Finance

Snap Finance has an unusual model: First, the customer applies to Snap for credit; once approved, they can start shopping with you if you’re a Snap merchant partner. There’s no upfront cost to you, but Snap keeps a small percentage of every transaction; the rest is paid to you in two business days.

Snap’s model is “lease-to-own” financing: The customer takes the item home but doesn’t legally own it until it’s paid off. This protection helps Snap extend credit to consumers with poor credit. Snap financing is not available in all states and can only be used for certain types of purchases, such as furniture, mattresses, wheels, tires, appliances, electronics and jewelry, in amounts from $250 to $5,000.

How much does customer financing cost businesses?

Each third-party customer financing provider has its own approach to charging merchants. Most of them charge fees for transaction processing — only one of the six providers mentioned above, Financeit, doesn’t.

Since fees are typically based both on the number of transactions and a percentage of their value, it’s important to know these metrics for your own business to estimate your costs. Not all fees may be spelled out on providers’ websites, so have a live conversation with a representative before making your decision. Be sure to ask:

• What percent of transaction value they charge
• What fixed fees are involved (e.g., per transaction, per month, per store)
• What the charges are for initial setup, software and training

Alternatives to customer financing

The cost, complexity and risk of in-house customer financing may feel like too much to take on when starting a retail business. And while third-party financing solutions are easy to implement, you may find them too expensive to justify the potential increase in sales. If this is the case, you can consider some of these alternatives:

  Payment plans: A payment plan can be as simple as giving customers 30, 60 or 90 days to pay their bills. And, you still might be able to get your money up front by using accounts receivable financing.

  Credit cards: Accepting major credit cards is a simple way to get paid up front while letting customers pay over time. You may even be able to charge customers credit card surcharges or convenience fees to offset your own credit card processing costs.

  Loyalty programs: In exchange for marketing opt-ins or a membership fee, you can offer loyalty program members special deals like reward points or free shipping to encourage repeat purchases.

  Coupons and discounts: These purchase incentives can be tailored specifically to what you’re trying to stimulate, such as getting new customers, encouraging newsletter signups or clearing out old inventory.

  Layaway programs: Offering a layaway program lets your customers pay over time, but because you hold the purchased item until it’s paid for in full, you eliminate your risk of bad debt.