A few decades back, the trend of consumers was to save first and pay later. But the present trend is to buy now and pay later.
The lifestyle, priority, expenditure pattern, etc., have changed consumer behavior manifold. To live with the changing pattern, consumer financing solutions have come into the picture.
What Is Consumer Financing?
Consumer financing refers to granting funds to the customer at the point of sale by a lending company. The funds’ repayment is deferred in part payments over a certain period under a plan agreed upon at the transfer time.
Consumer financing empowers the consumer to purchase an item that they otherwise couldn’t afford to pay upfront with cash or credit card. In fact, customers admit that they spend more when easy financing is available.
The financing company lends money to the customer, manages collections and allied work. It permits businesses to focus on their products, boosting sales and conversion rates in the process.
If you are looking for a consumer financing solution that has your customers’ best interests in mind, refer to the following checklist before signing the contract.
1. Approval On Loan Amount
If a customer is making a significant purchase, the loan amount will be higher. Approval on loan amount depends upon the item being purchased, customer’s credit score, income level, and other factors deemed appropriate by the lender.
Putting a limit on the loan amount in a way discourages the customer from making the purchase. The customer may choose to walk away or settle for a less costly item. Overall, the merchant loses on revenue.
Sunlight Financial has put in place a loan amount threshold for certain services. Instead of setting a limit, deciding on a case-to-case basis is always the best option. A prime customer who has the eligibility to repay won’t get disappointed due to the loan amount threshold.
2. Flexible Interest Rates
The interest rate is the amount the lending company charges the customer for the debt. It is expressed as APR – annual percentage rate. This rate is directly proportional to the degree of risk associated with the borrower.
Generally, the interest rate varies depending upon the applicant category and from one lender to another. Any lender who is flexible in deciding the interest rate based on the customer’s profile helps the merchant rope in more business.
Customer financing options with high-interest rates can place an undue financial burden on the customers and restrict future sales.
As a result, a business should research the credit policies of several consumer financing companies before entering a contract. It will help them determine whether an average target customer would be eligible for financing or not.
3. Repayment Schedule
When consumers opt for financing, the lender expects that they will ultimately repay them on time. The repayment schedule is the contract time that passes between issuing a loan and receiving the money in full from the borrower.
A standardized repayment plan does not meet all consumer needs. Standardized plans become a major hindrance for customers who want to stretch their monthly installments over a more extended period.
In that event, the merchant stands in a disadvantageous position for not meeting the customer’s needs.
4. Eligibility Of Products Or Services
Consumer financing companies don’t lend on all types of products or services, and costs to be paid in installments.
For example, a lending company may set a maximum and minimum cost threshold. Products or services above and below that threshold might not be eligible for financing.
Consequently, if the customer wants to increase the order value, no installment option can be a barrier to sales.
In the case of varying requirements, it is essential to check whether the types and costs of goods or services the merchant is offering are eligible for the financing company’s payment plans.
5. Cost Of Consumer Financing
Some finance companies charge the merchant nothing for financing their customers. Some companies are free for the merchant.
In contrast, some lending companies want a fee. They either charge the merchant for a percentage of each sale (e.g., 2%) or a flat monthly rate.
With this in mind, a merchant should think about whether the sales volume can outweigh these fees charged by the financing companies for offering financing options to its customers.
6. Setting Up
Setting up a customer financing option should be painless for the merchant. Similarly, applying for customer financing and enrolling in a payment plan should be effortless for the customers.
The setup arrangement should not require integrating costly or complex equipment into the existing payment infrastructure or the customers to fill out lengthy paperwork.
A merchant should think about the actual per transaction cost that one would incur from a third-party provider and any tangential costs like time and money to implement the program, train the employees, maintain the process, etc.
No wonder the fewer fees a provider charges and the more assistance they offer for setup and maintenance, the better.
7. Reputation Goes Hand In Hand
When a merchant is offering a financing solution for purchase, directly or indirectly, they are guaranteeing that the financing company is reputable.
Even if customers know that the financing company has a separate entity, a bad experience could still prevent them from coming back. Sometimes they may blame the merchant for the financing company’s mistakes.
In essence, the customer experience is ruined, and so is the reputation of the merchant.
The Bottom Line
Businesses of all sizes can benefit from consumer financing as it converts a passive buyer into an active buyer. But offering a comprehensive portfolio of finance options is not enough if the lending policy is not flexible.
To get the best deal, businesses should do their due diligence before signing a contract with the financer. For instance, Aqua Finance plans cannot be customized and give a significant setback to its contracting partners.
In the era of consumerism, a generalized approach will only result in the loss of business. Business needs to have the right advice, the proper support and the right financing solution for its varied customers.
