Customer financing, in simple terms, refers to ‘buy now and pay later.’ The customer usually needs to pay a portion of the total cost before releasing services or goods. This type of financing is usually B2C (business to customer) instead of business to business (B2B). If you offer customer financing services, you can either work with a third party or provide in-house services.
Customer financing, in simple terms, refers to ‘buy now and pay later.’ The customer usually needs to pay a portion of the total cost before releasing services or goods. This type of financing is usually B2C (business to customer) instead of business to business (B2B). If you offer customer financing services, you can either work with a third party or provide in-house services.
Let’s discuss each option in a much more detailed way:
In-House Customer Financing:
In-house customer financing option directly means that the merchant takes all the financial risks and can earn all the possible financial rewards. If you consider this an option, then there are some things you want to think through first. Check the below features to know more about in-house customer financing:
- Cash Flow: If you can tackle in-house consumer financing options, then you’ll first need to consider your business finances. You need to understand cash flow before you make any financial projections. You must know that when you start customer financing programs and start to handle customer purchasing, you’ll eventually have a time of reduced income. You will not receive the full payment of the services and goods you are selling. You must ensure that you have enough funds to run your business’s everyday operations when you wait for the installment payment to come and become a regular part of your cash flow. Customer financing companies will do good if the customer purchases more than they did before, then cash flow will increase.
- Legal Risk: When it comes to charging interest or lend money, there is a possibility for both federal and state usury and debt collection laws to apply. If customer financing companies fail to follow them, they will be subject to penalties and may end up paying fines. As a customer financing service, there will be a point when you think to charge interest on loans, and if that is the case, you must always check about the state’s usury laws that govern, among other things. Also, keep in mind that if you are selling online and the customer is in different regions, you might also be subjected to the other region’s usury laws.
The laws are usually restricted on the amount you can collect according to the asset. The laws differ state-wise, and this may sometimes come out to be complicated for customer financing companies. If you are thinking of starting an in-house customer financing operation, always consider specialized lawyers in the same area.
- Operational considerations: If you want to open your own company and provide customer financing services, you will have to hire new staff. If you’re going to pull out a credit report for every application before you decide if you must offer customer financing to that individual or not, you must have some helping hands. There would also come tasks to keep internal records to keep and additional paperwork to do as the customer pays off the debt. The records of customer failure to pay the debt must also be there to check everything. If you do not hire people, there is a possibility that you will end up with huge losses.
Internal processes must also be set up smoothly and move the customer through each step slowly and systematically. Every task requires additional employee hours to consider all these operational changes and needs before hiring people to help you handle the customer financing programs.
- Bad debt: There is a possibility that some customers may not be able to pay off the loan. The legal aspects of debt collection must be taken care of and must step for customer financing companies. Bad debt may also have a financial impact on your business’ cash flow. Beforehand, you must know how much bad debt your business will absorb without impacting cash flow before you decide to move forward.
Third-Party Customer Financing
Apart from in-house financing, there is also a third-party customer financing option. If you are not interested in getting through the headaches of in-house financing, there is an alternative for customer financing. Many customer financing companies are expressly set up to do just debt collection or customer financing. These companies also sometimes do not charge anything for their services and send the customers for financing. Some customer financing companies charge you a fee to send customers. They also keep the fees (interest) that the customers pay to obtain financing, and in return, these companies offer customer financing operations and legal formalities.
It all depends on you which service seems more feasible for you, be it in-house or third party. But before you conclude and make a choice, make sure to understand all the expected profits of both types.