Customer financing: A guide for small businesses

When a customer wants what you're selling but can't pay in full, you lose the sale. Customer financing changes that. It lets your customers pay in installments instead of upfront, spreading the cost over weeks, months, or years.

This doesn’t mean you have to wait to get paid. Instead, a third-party financing company funds the purchase, paying you the full sale amount upfront, often minus a small fee. Below, find out how customer financing works and how to use it to generate bigger orders and more sales.

What is customer financing?

Customer financing is a payment option that allows your customers to pay in installments for your products and services, rather than all at once. They spread their payments over weeks, months, or longer, depending on the terms you or your financing provider set.

This is not a loan you take out to grow your business, like a commercial mortgage or equipment financing. Instead, it's something you offer your customers so they don't have to find the full amount before they buy.

Why is it important to offer customer financing?

Offering customer financing is important because it stops you losing sales to customers who want to buy but can't pay the full amount upfront. Here's how that looks across different types of business:

Three advantages of offering customer finance:

• Bigger orders: People paying monthly think about the monthly amount, not the total, meaning their average order values tend to be higher
• A way to compete: Larger retailers already offer financing, so doing the same levels the playing field without you having to cut your prices
• Repeat customers: People appreciate being given more than one option to pay, and that goodwill brings them back for follow-on orders

That’s how customer financing for small businesses benefits both you and your customers.

How does customer financing work?

How customer financing works varies depending on the provider and type, but the basic flow from application to repayment is similar:

• Customer interest: The customer wants what you're selling but needs to spread the cost
• Application: They apply for financing to purchase your products or service
• Credit check: The finance provider assesses the financial risk of the customer before deciding whether to approve their application
• Approval and terms: Your finance partner present the terms of the facility, including how long, how much, and the interest rate charged
• Purchase made: If the customer agrees, they sign (or e-sign) the agreement and the sale takes place
• Customer repayment: The customer makes regular repayments to your finance provider, in line with the agreed schedule
• Business receives funds: Your finance provider pays you for the purchase, minus their fee

Types of customer financing

There are multiple ways to offer your customers finance, and they broadly fall into two categories:

• Primary: Credit cards, conventional loans, and other options that rely on a customer's credit score.
• Secondary: Lease-to-own and loan options that are open to all sorts of credit types.

Some give you greater control, while others take the work and the financial risk away from you.

In-house

Customer financing type: Primary

In-house finance is when a business acts as the lender and collects payments directly from their customers. 

To do it well, in-house financing requires a solid accounts receivable process and the following four things to be in place:

In-house financing works well for contractors, medical or dental practices, auto repair, or businesses offering high-ticket services. There’s no provider taking a fee, and you control the terms.

The risk is that your business will have to chase money from clients who stop paying. According to the Intuit QuickBooks Small Business Late Payments Report, over half (56%) of small businesses surveyed are actively challenged with unpaid invoices, with impacted businesses holding an average of $17,500 in tied-up revenue.

If they don't pay at all, that becomes a bad debt expense your business absorbs. You also need a very healthy working capital position to manage cash flow between the time you deliver products or services to customers and the time you receive full payment.

Third-party

Customer financing type: Primary

With third-party financing, a financing company handles the loan. They pay you upfront, and the customer repays the lender directly, so you're not responsible for collecting payments.

Providers typically charge a percentage of the transaction for their service, so you'll want to factor that into your pricing.

Getting set up is straightforward. Most providers offer plugins for e-commerce platforms, POS systems, and contactless payments terminals, so you can add financing to your checkout without rebuilding anything.

Third-party financing is a good idea for businesses that don’t want the administrative burden of collecting payments or the credit risk of customers not paying what they owe.

Buy Now, Pay Later (BNPL)

Customer financing type: Secondary 

BNPL is a type of third-party financing that splits a purchase into short-term, often interest-free installments. The repayment schedule is typically four payments over up to six weeks.

Approvals happen almost instantly, and the whole process is designed to feel easy for the customer. Most providers let you add a payment link or checkout button with very little setup. The main providers are Afterpay, Klarna, Affirm, and Sezzle.

BNPL works best for lower-to-mid ticket purchases and is popular with online shoppers and younger buyers.

BNPL is a good option for an online store, a boutique, or if you want a simple financing option that requires minimal setup.

Credit cards or lines of credit

Customer financing type: Primary 

Accepting credit card payments is the simplest form of customer financing. The customer pays you by card and manages their own repayment schedule with their card issuer. 

Some businesses go further and partner with a card issuer to offer deferred-interest or promotional financing, like 0% for 12 months. That gives the customer an extra reason to buy now without you needing to set up a separate financing program.

This option has the lowest setup burden but also the least control over terms. It’s best suited to businesses with smaller average transaction sizes, or you don’t want to work with a dedicated finance partner just yet.

Pros and cons of customer financing

Offering customer finance can grow revenues and attract new customers, but it also comes with costs and risks, depending on the type of finance you choose to offer. Here are the main trade-offs to help you decide whether it's the right move for your business:

How to offer customer financing in 4 steps

Offering your customers a way to pay over time can encourage loyalty and win you sales on higher-ticket items. Here's a four-step process covering how to set up customer financing and get it running.

1. Evaluate your business needs 

Before you pick which type of financing you want to offer, consider:

• Risk tolerance. Are you happy being the lender, or would you rather someone else take that on instead?
• Cash flow. Do you have enough working capital to wait for payments to come in over months, or do you need the money right away?
• Ticket size and industry. Third-party apps work best for retailers and online sellers, but they are not a good fit for wholesalers, professional services, or manufacturers with bigger, less frequent sales.

The table below shows how in-house and third-party finance differ:

2. Set up your finance option

Once you’ve decided between in-house and third-party financing, you need to set it up. The route you take depends on the choice you’ve made.

If you select a third-party approach, there is a lot of competition, so shop around before you commit. Each one has its own way of operating, so compare:

• The fees they charge you per transaction
• The credit limits they offer your customers
• How the application process works for the buyer
• How easily it plugs into your website or till
• What payment methods the provider gives your customers for their installments

You should also consider the type of third-party finance provider you want to partner with. BNPL providers like Afterpay, Klarna, Affirm, and Sezzle work well for retail and e-commerce, where the typical sale is in the low hundreds to low thousands.

Point-of-sale finance providers like Synchrony, CareCredit, and GreenSky fund bigger purchases over longer repayment terms, often with interest. They’re popular with car dealerships, dental practices, and home improvement contractors.

If you select in-house, you'll need to work everything out yourself, including:

• How long customer repayment periods will be
• How much you charge in interest, if you decide to charge it
• The level of deposit you ask for upfront
• A written financing agreement that sets out your terms
• Deciding whether you’ll credit check customers and establishing limits based on those scores
• Which platform you'll use to accept digital payments for customers’ installments

With the terms and agreements sorted, the next step is making it visible to your customers.

3. Integrate it into your checkout or sales process

Once you have your financing plan, it’s time to implement it. 

• For third-party providers, add the financing option to your product pages, checkout, and point-of-sale system. Make sure customers can see these options when they’re looking at the price, so they don’t rule a product out because they can’t afford it.
• For in-house financing, build it into your invoicing software. Set up automated reminders so you're not chasing every installment yourself, and enable recurring payments so installments come in on schedule. If you invoice on the go or sell from different locations, make sure the setup works everywhere.

Whichever route you take, offer customers as many electronic payment options as possible, like card, bank transfer, or AutoPay . The easier you make it, the more likely you’ll be paid on time. 

4. Communicate options to customers

Once the system is live, promote it. Mention financing in your email campaigns and on social media, especially when you're promoting higher-priced items. If you take payment in person, like at a physical location, add signage where people can see it as they browse, not just at the till.

At a minimum, customers should know:

• The payment schedule and how long it runs
• Any fees or interest they'll be charged
• What happens if they miss a payment

The clearer you are from the start, the fewer problems you'll deal with later.

On your end, track every outstanding balance in your accounting system and follow up on late payments as they happen. If you're running it in-house, this is where having a proper collections process already set up makes all the difference.

Choose the best payment setup for your business

Customer financing helps you close more sales you might otherwise lose because of the price. Whether you run it in-house or through a third-party provider, the extra revenue and repeat business it generates can more than cover the cost.

If you decide to manage financing yourself, QuickBooks Online Payments lets you send invoices, collect installments, and track what's outstanding, all from one place.

Disclaimers:

*QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.*