If you’re going to sell expensive items to customers, you should be prepared to offer your customers some form of financing. Once offered, your customers can take advantage of loans and payment plans to break a four or five-figure purchase into digestible monthly chunks. In exchange, your business gets to land more sales, generate more revenue, and even make your customers happier, as long as you do it correctly.

It’s a way of improving your business’s financial flexibility while simultaneously serving your customers better, so let’s dig into the mechanics of this offer.

What Is Customer Financing?

Customer financing allows your customers to opt into a payment plan to buy your goods or services. For example, let’s say you sell jewelry for $1,000 to $10,000. You have a customer who wants to buy a $5,000 engagement ring, but they only have $1,000 cash. Through customer financing, they could make a $1,000 down payment, borrow the remaining $4,000, and start paying off that borrowed $4,000 in monthly installments of $167 each over the course of two years.

The Advantages of Customer Financing

There are many different advantages of offering customer financing. For example:

  • Close more sales for more people: As we’ve already begun to explore, customer financing can help you close sales that you’d otherwise lose. For example, customers with a limited budget and those who are not interested in a single, massive payment can now afford a full purchase. That means you’re going to be more attractive to more people, and you’ll eventually close more sales. You might even be able to market and advertise to an entirely new set of demographics.
  • Increase average order value: Similarly, you’ll also be able to increase the average order value. If financing isn’t available, a customer with $3,000 in cash is going to be limited in the type of used car they can buy. If financing becomes available, they may be willing to pay much more for a vehicle – expanding their range of options and (likely) increasing the total amount they spend.
  • Improve convenience for customers: For many customers, financing is also very convenient. Rather than coming up with a long-term savings plan and waiting months for a purchase, they can make the purchase immediately and make pre-portioned monthly payments until it’s completely paid off.

Additional Advantages

  • Benefit from consistent income: Some businesses may also appreciate the consistent income that comes from customer financing. Instead of dealing with the ebb and flow of massive customer purchases, you’ll have a database of customers making monthly payments. This allows you to better predict a portion of your company’s revenue for months, or even years into the future.
  • Capitalize on interest and fees: This isn’t always a benefit, but if you’re offering primary financing, you may be able to capitalize on interest and fees. Even a modest 2% or 3% interest rate can help you make more out of every transaction, and cover some of the additional costs of offering financing in the first place.
  • Build better customer relationships. Having monthly payments gives customers a reason to interact with your brand on a regular basis. Additionally, through financing, customers have a more comprehensive range of options and typically end up more satisfied with their purchases. Accordingly, businesses with customer financing end up with better customer relationships.

There are a few downsides to consider, however. For the most part, the disadvantages boil down to cost and hassle. If you go with a third-party for your financing needs, you’ll pay fees for the service. If you internally process all the financing, you’ll need staff members and new technology to do it. Arranging for financing, collecting missed payments, and doing additional financial calculations can also take a lot of time.

Types of Customer Financing

There are a few different customer financing types to consider, though they primarily function the same.

  • Primary financing: Primary financing is customer financing offered through the company itself. Your business will be responsible for processing applications, providing funding (if necessary), and collecting payments.
  • Secondary financing: Secondary financing, as it’s sometimes called, is also done through your business, but it’s a bit more passive. These include strategies like layaway and rent-to-own.
  • Third-party financing: You can also use third-party financing, where you offer financing to your customers through a third-party organization, like a bank or payment processor. You’ll save a lot of time and hassle. But, you’ll have to pay some fees to get access to these services.

Review Your Options

Before offering customer financing, review your options carefully and do your due diligence.

  • Consider both primary and third-party options: Both primary and third-party options can be beneficial, so don’t rule anything out until you’ve done your research. For example, offering direct financing gives you more control but can be more demanding and may require you to make new hires. Third-party funding, by contrast, is much more convenient but more expensive.
  • Check out the competition: What are your competitors offering in terms of customer financing? If there aren’t many offers, this could be a critical way to differentiate your brand. Otherwise, you can learn from their offers and attempt to beat them at their own game.
  • Survey your customers: Do your customers even want to finance? Would they buy more if you offered it? The best way to figure this out is to ask your customers directly, preferably in the form of a survey.
  • Review the law: Your business may be subject to financing laws, restricting how you can market your financing, how you can offer financing and the paperwork your customers must fill out before applying for financing. Be sure to consult with a lawyer on this matter.
  • Crunch the numbers: Will customer financing end up being profitable for your business? Consider the number of customers securing financing and the interest rate and fees you’re charging. Also, consider your internal and external costs and the effects on your sales and average order volume. Of course, at this point, it’s only an estimate. Still, it’s a strong predictor of whether or not the move will be worth it for your business.

Market and Advertise Your Financing

Once financing is in place, you’ll need to let your customers know it exists.

  • Make the announcement to your current customers: Leverage the power of email, social media, and other channels to educate your current customers about the existence of this financing – and make it a prominent feature of your website.
  • Reach new demographics: Consider investing in a new ad campaign to reach demographics who might have been unable to purchase from you in the past.
  • Focus on the monthly cost: In your marketing and sales efforts, focus on the bottom-line monthly cost rather than the total cost of the purchase; it’s usually much more attractive.
  • Compare and contrast: Show how your financing compares to both an outright purchase and a competing financial offer.

Begin Accepting Applications

You shouldn’t offer financing to every customer. Before approving anyone, make sure to collect some basic information on them. Collect their personal information, their credit score, and some data on their financial history. Then, you can run a credit check and evaluate their financial trustworthiness. And, if they meet your business’s ideal benchmarks, you can let them finance the purchase.

Have a Plan to Deal With Non-Payment

You’ll also need to have a plan in place for dealing with customers who don’t make their payments on time or in full. For the most part, you’ll follow the same procedures you use when dealing with an unpaid invoice, gradually escalating your actions until you get the results you want.

  • Automated follow-ups: Start with a handful of automated follow-ups; sometimes, people simply forget to make a payment, and this will prompt them to remember.
  • Manual follow-ups: If your automated follow-ups aren’t doing the job, try contacting them directly (preferably by phone) with a polite but firm reminder.
  • Fees and penalties: After a certain amount of time has passed (such as 15 days), consider imposing a fee or penalty as an additional incentive for payment.
  • Additional warnings: If time passes and you still haven’t heard from your customer, or if they fail to make good on their promises, you’ll need to escalate the situation.
  • Collections: A collection agency may be able to help you collect money from customers who have consistently avoided payment.
  • Legal action: You may also need to take more aggressive legal action against people who owe significant sums of money to your business.

Every business needs to plan its finances carefully – and that extends to the financing you offer your customers. Customer financing isn’t right for every business or every market. However, if it’s a good fit for your brand, it could benefit you in several different ways. Take your time, do your research, and optimize your offer to maximize both income and customer satisfaction.


Stay Connected

Join over 100,000 of your peers and receive our weekly newsletter which features the top trends, news and expert analysis to help keep you ahead of the curve.