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Customer Financing for Small Business: Can You Afford to Offer it?

How Does Customer Financing Work?

As a small business owner, you may be asking yourself, “How can I get financing for my customers?” Customer financing is an excellent way to increase the number of sales you make, as well as encourage customer loyalty and repeat purchases. It targets potential buyers who want your product but aren’t sure they can afford to pay the full amount upfront with either cash or credit card. Usually, the company offering the financing specializes in this as opposed to the traditional lender.

One significant advantage is that financing companies, which can be an online lender, have financing options for your customers, and often provide instant approval. It gives them a finance solution and an option of buying now with only a down payment and paying off the rest in smaller future payments, often with an attractive interest rate. Your business is offering a personal loan without your customer going to the bank or credit union for a traditional bank loan. Check with the customer finance lender for the minimal personal credit score for acceptance. Depending on your product or service, you might find financing even with a customer with bad credit.

As the business owner, you’ll see increased sales and a potential increase in average order size, which means increased revenues.

Typically, customer financing for small businesses means you bring in a third-party lender that offers consumer financing to take care of the payment details. This may be an alternative lender. When a customer goes through the application process and signs up for a payment plan, their account is now the responsibility of the third-party lender rather than your company.

By offering financing, the lender will pay you the full amount of the customer’s purchase. This strategy means you don’t have to wait for them to finish making payments. If there are any problems with payment after this point, the lender will be responsible for contacting the customer and making the necessary arrangements.

Why do businesses offer credit to customers?

You can also create inhouse financing , which is your own self-sustaining customer financing options if you have the cash and wherewithal to back it up and the human resources to run it. With this option, you may be able to earn more on each sale by factoring in interest rates and late fees. Plus, you will be giving customers more buying power, which means more sales. Naturally, there are pros and cons to any strategy. For one, you are the lender. This means you’re offering your customers a short term loan or microloan.

Implementing Customer Financing for Small Business

Once you have secured funding or signed up with a lending institution, it’s time to create a plan of action for moving forward. You need to evaluate what the program will cost you to operate and decide what the cost will be for the customers. You’ll also need to set up the program and make a plan for promoting financing and letting customers and potential customers know you offer financing to your customers. After that, the steps flow pretty smoothly.

Customer Applies for Financing – The customer fills out an application and checks for eligibility.

Customers Get Approved Let them know they have the approval and what the consumer financing company expects.

Offer Promotion – This is a great time to give customers promotional offers because they now have credit to spend in your store. It also makes them feel valued, plus who doesn’t love a good deal?

Begin Payment Plan – Customer pays off installment loans by making regular payments.

Finally, you will need a collections strategy if you are internally offering financing to customers, in case some customers miss payments. Determine a course of action before starting the program and implement staffing and resources to carry it out.

Can You Afford to Offer Customer Financing?

f you prefer to run a customer financing program through your own company, but do not have the cash to get it going, there are lending options available. The best way to determine which financing option is the best fit for you and your company is to sit down with your preferred lender and discuss the possibilities.

Choose a lender that has experience working with small companies and provides a variety of options including but not limited to business lines of credit. Offering customer financing solutions can increase cash flow. However, it comes with a subset of financial risks you need to determine before offering consumer credit.

You will need financing platforms to manage your customer monthly payments. You now become the lender. You’re offering term loans where the customer pays you, and you’ll be building a larger accounts receivable item within your financials. You will be required to do a credit check and will be providing store credit card or debit cards. This means that you can turn browsers into buyers.

How do you finance a small business?

Business funding comes in as many different sizes as there are businesses. The small business loan can range from a high risk business loan to invoice financing. Check out these additional financing options.

Working Capital Loans

Working capital loans are designed for businesses and used to finance daily operations or projects. They can be used to stay on top of payroll, purchase seasonal inventory, or implement new programs (like customer financing) that will help your company to grow and succeed. This type of loan is set up like a traditional loan, with monthly installments paid over a set amount of time.

Business Loans

Unsecured Business Loan

Unsecured business loans are also set up with regular payments over a designated period, but with this type of loan, you do not need to have excellent credit or provide collateral. With a secured business loan, you will need to have a good credit score and provide collateral, but you will most likely get better rates. Either of these strategies may work for you. Depending on your current situation, so be honest with your lender about your finances, and don’t be afraid to ask questions.

Other Loan Options

High risk business loans Your credit score, not your balance sheet, typically defines whether a loan is a high risk or not. FICO scores between 500 to 650 typically fall into this category. Bad credit and poor cash flow can reduce the loan amount made available to you.

Merchant cash advance – aka business cash advance or merchant cash. This business funding option is one of the easiest for approvals. Your personal credit has the least amount of impact. This a secured loan in the sense that you are selling your future receivables.

SBA loan The SBA loan requires both a strong personal and business credit score. The approval is coming from a bank that specializes in SAB loans and it’s backed by the Small Business Administration.

Equipment loan This loan is usually secured by the equipment you’re looking to either purchase or lease.

Invoice factoring This loan option works well with both new and established companies. If you have a business customer that is creditworthy but is having difficulty staying current with payments you can convert those receivables into cash. No additional debt on your balance sheet – just getting paid sooner.

Get Started

All you need is a one page loan application and the past three to six months of business bank account statements. Learn more about online small business loans so you can get the cash and capital to create customer financing for your small business by contacting Sunwise Capital.

Mark Kane

Mark J. Kane is a successful entrepreneur and small business owner. He spent 17 years in the investment banking industry. As CEO of Sunwise Capital, he understands the challenges of building a business through equity, debt, and off-balance sheet financing.

Take Your Business Further With A Loan From Sunwise Capital