For companies whose products have a high sticker value, being able to offer customers multiple payment options is essential. Accepting credit cards, cash and checks is fairly standard, but there are also other financing choices that could help give your business a competitive edge. One of these is retail financing.
What is Retail Financing?
Sometimes called customer financing or consumer financing, retail financing provides customers with a short-term installment loan for purchases above a certain level.
Here’s how it works: Your business partners with a retail financing company. When your customers make a purchase, they can apply for such financing. Approval is granted or denied in just minutes. The customer signs the paperwork, and the transaction is completed. The finance company gives you the money and then collects the loan every month from the customer for the next 6 to 24 months.
For example, a customer buys a $3,000 mattress set using 12-month retail financing. They put $500 down and finance the remaining $2,500 balance at 10% APR through the retailer’s financing partner. This equals $215 monthly payments over the next year to pay off the loan.
Benefits of Retail Financing
1. Decreased Risk
More customers can afford expensive products when spread into manageable monthly payments.
One benefit of offering such financing to your customers is a decreased risk to your business of default. The retail financing company assumes liability for the repayment. They will go after customers for the money owed; you no longer have to.
2. Increase Sales
The easier financing terms encourage more customers to make purchases. Retail financing gives a company a competitive edge.
This type of financing program could help you increase your sales compared to competitors, as it might attract some people who wouldn’t otherwise be able to buy your products. And with some companies, you may even be able to make a little extra money on those financing loans as they increase the interest rate to give you a cut.
3. Increase New Customers
Applicants don’t need perfect credit to qualify, expanding the potential market.
Businesses that provide financing expand their potential customer base by making their goods and services more accessible to a wider range of customers. Not everyone has the money available to pay for a significant purchase up front.
4. Lowers risk
The lender assumes liability for collecting repayment from the customer. Bad debts no longer impact retailers.
5. Added revenue stream
Retailers may receive a small percentage of the interest income from the financing loans.
Potential Drawbacks of Retail Financing
There can be high fees associated with signing up for the program as well as set-up costs in some cases. You will have to determine whether this program would increase your business enough to make the out-of-pocket costs worth it. Part of that means determining if your customers would truly be interested in such financing.
- Customer fees: Interest rates on retail loans are usually higher than traditional financing.
- Retailer fees: Providers may charge enrollment or transaction fees to the retailer.
- Lower margins: Interest paid to financing partners can eat into profit margins on sales.
If your working capital could use a boost, retail financing may be the solution to your business’s funding needs.
Overall, retail financing allows customers easier access to credit for large purchases while opening up sales opportunities. Retailers must weigh the costs versus the potential revenue benefits for their specific business model and target audience.