As a small business owner, you know that building customer loyalty is as important to your bottom line as attracting customers in the first place. One popular way to encourage sales is to offer customer credit, or in-house financing. Offers for financing or deferred payment can help attract new customers and keep existing ones coming back. However, it can also be a risky strategy, particularly if you’re a new business or don’t have a lot of existing capital to absorb losses. Here are some things to consider about offering in-house credit.
What Is In-House Credit?
In-house credit or financing essentially means you offer the customer a loan out of your own pocket, or that of your business. This can be an attractive option for customers who are unable to get financial help from a bank, for various reasons. When you deem a customer eligible for in-house financing, you will most likely charge the customer a smaller upfront fee to receive your product or service, and then work out a payment schedule by which the customer can pay back the remainder of the value of the product over a longer period of time. In most cases, customer payments for in-house financing include interest fees, allowing your business to recoup the initial value of the item and additional money for the added time.
You can also choose to offer options for deferred payment or instalment payments. Payment deferral means the customer receives the item right away and pays later, after a set period of time. This method allows the customer to purchase an item she may otherwise have been unable to afford by giving her a few months or even one or two years to save up for the payment. Instalment payments work similarly; the customer takes the item home and pays the full price in small chunks over a period of time. Rather than paying a lump sum of $600 for a sofa, for example, the customer could opt to pay $60 per month for a period of 10 months.
Financing for Products
In-house financing can work well if your business deals in big-ticket items. Major purchases like cars or appliances can be daunting for consumers because of the high upfront cost. Offering financing options for such products can give your business a competitive edge and help hesitant customers feel safer in making large purchases. For most consumers, it’s easier to think about paying a few hundred dollars per month for a year or two than to think about handing over tens of thousands of dollars at once.
Businesses like warehouse suppliers and manufacturers that sell directly to other retail businesses can also benefit from this type of financial aid for customers. High-volume purchases of smaller individual items can present a high upfront cost. Offering payment deferral or instalment payment options for returning customers works similarly to present your business as a lower-risk option for other small business owners.
Financing for Services
If your business specializes in a service, such as money management or home upgrades, in-house credit might be an attractive option for customers. For example, if you provide a roof repair service, you might allow your customers to defer payment by six months. This makes your business a great option for those in need of emergency repairs. You allow the customer to receive the service they need right away, while still being able to save for six months to reduce their own financial stress. You gain a wider potential customer base, and your customers see you as a business that takes their personal needs into account, making them more likely to refer you to friends and family.
Reducing Your Risk
Customer credit incentives are of little value to you if they put your business profits in jeopardy. Luckily, there are some things you can do to help minimize the risk. If you plan on offering financing options, you should also plan to run a brief credit check on customers who want to take advantage of these options. Create an easy-to-understand contract form so your customers can consent to having their credit history examined. Common types of credit checks that you might perform in this situation include:
- Credit Bureau Search – this allows you to find out about any existing outstanding loans on the customer’s record.
- Writ of Execution Search – this lets you know if the customer has ever been ordered by a judge to pay an outstanding fee.
- Bankruptcy Search – this shows you if a customer has filed for bankruptcy at any point in the past six years.
A credit check allows you to make an informed decision before lending money to a customer. If a customer’s previous record includes a red flag such as a recent bankruptcy, or if a bank has already laid claim to a possession the customer is hoping to use as collateral, you can use your best judgment in approving or denying that customer’s request.
Another way to avoid confusion and liability is to ensure all your literature relating to the types of credit your offer is understandable and consistent. Be clear about the duration of instalments or deferrals, which products are eligible, and what fees are applicable. If in doubt, hire a lawyer or a technical writer to give you a second opinion.
In-house financing can be great for growing your business and staying competitive, particularly in long-term service and business-to-business retail industries. Determine what level of financial risk your company can handle, and select a credit option that suits both you and your customers.