Customer financing: A guide for small businesses

If you are a small business owner, the financial resources of your customers can play a key factor in your company’s success. Customer financing, such as buy now, pay later services, can encourage shoppers to complete their purchases. 

Customer financing can be a win-win situation for both customers and business owners, but it also comes with extra steps, such as managing a customer credit policy. Let’s explore the types of financing you can offer, how to implement them, and your alternative options. 

What is customer financing?

Customer financing is a program or service a business offers to help customers pay for products, goods, or services over time. Usually, financing involves an application process where the customer’s overall credit risk is assessed with a credit check.

Types of customer financing  

By offering customer financing, businesses may attract more customers who aren’t able to afford the full cost of a product or service upfront. Additionally, customer financing, which provides an additional payment option, can help businesses increase sales. 

The main options for customer financing are primary financing, which considers creditworthiness, and secondary financing, which is open to all sorts of credit. Most customer financing methods are primary financing, while secondary financing includes such services as lease-to-own arrangements. 

(In-house) financing

In-house financing is where a business acts as a creditor and offers its own financing program to customers. This is a more involved process for the business than third-party financing.

For in-house loans, you may need to pay costs associated with credit checks and collecting payments, which require both software and staffing. You’ll also need to develop a credit policy for your business and have a system to manage your accounts receivable. 

Note that accounting software may help simplify the payment process with invoices and automated payment reminders—potentially freeing up time to focus on your business.

Third-party financing

Third-party financing refers to a type of financing where small business owners rely on a third-party provider to act as a lender at the point of sale. In most of these programs, the customer enters into a payment plan to pay off a purchase’s full amount over time, often through monthly payments.

Third-party financing companies allow a wide range of credit to be approved compared to other, more strict forms of financing. In some cases, these financing programs are interest-free, while others might assess interest charges at set interest rates. 

One of the most popular forms of third-party financing is the buy now, pay later model—a form of short-term financing that’s typically interest-free. Buy now, pay later financing is a popular tool for online retailers. 

The fees and expenses of third-party financing apps are typically a fixed amount per transaction (such as 30 cents) and a percentage of the sale. 

For example, a $300 sale using customer financing could include a $0.30 fixed charge for you, as well as 3.29% of the sale. Thus, the fees would be $10.17, which is the $0.30 fixed charge, plus $9.87 ($300 x 3.29%). 

The trade-off of these fees is that third-party financing companies handle credit checks and payment collection.

Customer financing alternatives

Some businesses may find third-party financing too expensive or unavailable for their industry. As a result, you may look into other ways to encourage customers to make their purchases. 

For example, service-based businesses like plumbing and HVAC companies can partner with specialized companies to provide financing. Simply accepting credit card payments could be another way to boost sales if customer financing isn't possible. 

Layaway is another option you can offer. It’s a payment plan where a business reserves a product for a customer until the customer pays for the item, typically with a series of partial payments.

Pros and cons of customer financing

Small business owners should evaluate both the benefits and drawbacks of offering customer financing. We’ve summarized some of the pros and cons below: 

Benefits of customer financing

• Increase order values: Businesses offering customer financing may see higher average orders. Larger orders mean more revenue to boost your bottom line. Plus, customers get to buy the product they want instead of a lower-cost option. 
• Improve working capital: When you offer payment plans and financing options to customers, it may allow you to invoice customers who would otherwise pay in arrears so you can receive a partial payment upfront instead. Receiving payment upfront, even if it’s only a partial payment, improves your cash flow management and gives you access to working capital.
• Close more sales: The initial upfront cost can be an obstacle for customers deciding whether to make a purchase. However, if you can break up the cost of a product or service with a payment plan, customers might be able to afford those smaller payments. 

Drawbacks of customer financing

• Added complexity: Offering in-house financing can add time and complexity to payments. Using the right tools can help you automate the added bookkeeping required to account for financing and payment plans. QuickBooks can help automate recurring payments, allowing business owners to accept payments online.
• Risk of bad debt: Although allowing financing can be a great way to get new customers, businesses that offer to finance assume some risk due to the possibility customers will not make payments according to the agreed terms. Establishing and enforcing a servicing or collections policy can help ensure you have safeguards in place to protect against bad debt.
• Minimums, fees, and expenses: If you use a third-party financing provider, you will likely have to pay fees for it. In some cases, you will need to pay a flat monthly fee, while other providers may charge a percentage of each transaction. Some providers also require a certain transaction amount before you can offer financing to customers during the checkout process. 

How to offer credit to customers in 4 steps

Introducing financing options for customers can encourage customer loyalty. Offering credit can be especially useful for high-ticket items or for customers who prefer paying in installments. 

Here’s a straightforward, four-step process to consider for offering credit to your customers, making it easy for them to shop now and pay later while driving growth for your business: 

1. Review your options 

In step one, you’ll evaluate whether it makes more sense to offer in-house or third-party financing. With in-house financing, you have more control, but you also bear the responsibility of collecting payment. On the other hand, you avoid the fees and expenses that can come with third-party financing. 

Third-party financing also might not be an option for your industry. Third-party apps work well for retailers and e-commerce stores, but they might not be a good fit for businesses like wholesale distributors, professional service firms, or manufacturers. 

When choosing a third-party financing option, consider: 

• Interest and fees the service or app will charge customers 
• The application process for customers 
• Credit limits they offer 
• Expenses they will charge your business 
• Additional tools or services they offer 

You want to make sure your in-house process or the third-party service process is not too cumbersome for customers. Also, make sure either process offers a high enough credit limit for customers to actually complete the purchase. 

2. Pick an option  

If you decide to go the in-house route, you’ll want to then start working on in-house policies, such as terms and conditions and methods for automating recurring payments. Additionally, you’ll want to decide on a credit application process. Note that in-house financing means you’ll have to dedicate more time to accounts receivables. 

If you go with third-party financing, you’ll want to decide on a service that is easy to implement. You also want a service that does not make the checkout process cumbersome for the customer.

3. Implement it 

Once you have your financing plan, it’s time to implement it. For in-house financing, this means creating an accounts receivable collection process. In particular, you’ll want to: 

• Prepare your accounting system for accounts receivable journal entries 
• Create a credit system for determining customer creditworthiness
• Set the credit terms you’ll offer, such as flexible payment terms

For third-party financing, you’ll need to add your financing option to the checkout process. This means adding it to your product pages, checkout pages, and point-of-sale systems. 

4. Let customers know  

Once you have everything in place, it’s time to let customers know about it. This can include email marketing or adding marketing to your website. You can also announce the financing via social media. More importantly, you’ll want to advertise on your product pages.

Choose the best payment setup for your business 

At the end of the day, it’s your decision whether you want to offer a financing program or financing options to your customers. Whether you decide on a third-party company or to provide financing in-house, these financing solutions can mean more sales.

When you do make a sale, you can make it easier to get paid with recurring invoices and by enabling digital payments via your payments software.

This content is for information purposes only and should not be considered legal, accounting or tax advice or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc., nor any of its affiliates or subsidiaries (collectively, “Intuit”), does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit cannot warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.