Consumer financing is a method for merchants to offer financing to their customers for the purchase of products or services. This is generally used in businesses that sell high ticket items, where consumers may want the option to defer payments or have a set monthly cost for the items they purchase. By offering a line of credit for your store, the consumer has the option to pay monthly instalments rather than paying a lump sum up front. This can be beneficial for individuals who want to manage their budget, yet still benefit immediately from your products or services. In the past, this type of lending facility was only available to large establishments with a high volume of sales and revenue. However, in today’s market it has been made available to small businesses as well; giving the opportunity for small local companies and franchises the to compete with the big box stores who offer financing already.
What are the Risks?
There is typically no risk to offer a consumer financing program to your customers. By using a third party you are able to offer financing without having to take risk on the loan yourself. The financier runs credit on your customer on your behalf, and owns the loan/debt. If a consumer was to miss a payment or default on the loan, the bank takes responsibility and deals directly with the customer to collect on the debt. The only instance where a merchant may be liable is where a customer makes a claim that they were sold goods that were not as described. For example, a jewellery store sells a cubic zirconia to the consumer, but tells them it is a diamond. This would be a fraudulent sale, for which the customer could open a claim with the lender and an investigation would take place. With that said, as long as the business is following the reasonable policies and procedures laid out in their agreement with the lender for offering financing on the sale of their products and services, any liability on a loan would be extremely rare. The process for a consumer to make a claim on why they shouldn’t have to pay is no different from what they would have to do with a Visa or MasterCard.
How Much Does it Cost?
The cost to a merchant for consumer financing is dependent on the lender they are using. Generally speaking, lenders will charge a small percentage of the total loan amount to the business for each transaction. Summit Lending, together with its lending partners charges 5% for each transaction. Depending on the niche that your business serves, there may be an opportunity to buy down the loan on behalf of your customer to offer a lower interest rate or a deferral of payments. For example, you could offer 3 months – no interest, no payments; or 0% interest for 1 year. There would be an additional fee to offer these options to consumers in the form of additional percentages paid to the lender. This is called a merchant discount rate (MDR).
As for the cost to your customer, the standard interest rate on a consumer financing loan ranges anywhere from 9% to as high as 50%. This is all dependent on the credit worthiness of the customer as well as the lender providing the loan. At Summit Lending our lender offers rates from 9.9% to 29.9% which is competitive in this space. The customer would also incur an administration fee from the lender, which is built into their loan, similar to the yearly fee they pay to their credit card provider. The loan is open and can be paid off at any time without penalty. As a customer pays down their loan over time, the credit limit remains available, like a line of credit to be used again for any future purchases with your store.
Why Should I Offer Consumer Financing?
Most business owners would say, “My customers don’t have issues paying for products?” This may be true, however offering consumer financing is not for your existing clientele. The benefit of having this as an option is more for marketing purposes. By marketing that you offer a consumer financing program, you will be opening up your business to a whole new market you were not previously targeting. Even if customers do not end up using the financing, simply making it available attracts people to your business who were not currently looking because of the high ticket price. The minor change in the psychology of your marketing campaigns speaks to potential buyers that your product is more affordable than it previously was. The additional leads calling your business or visiting your store can increase sales, even if the customer isn’t buying with a loan. However, when they do purchase through consumer financing, the opportunity for repeat sales also increases now that they have a credit limit with your store.
What is the Process?
Let’s say a customer walks in to your music store and wants to purchase a $2500 guitar. They’ve seen through advertising that you offer financing and would like to finance their purchase. By this time, your lender would have already provided a portal or app through which you can submit applications for credit with them. It’s as simple as entering the some standard information, provided by your customer (name, address, phone, email, income, etc). The application is then submitted online for an instant decision, on the spot. If your customer is approved, you move forward with completing the sale. Your customer is assigned a unique identifier, which would populate in the backend of your portal. This is where you can select the customer and submit the invoice/receipt to be funded. Once the invoice is submitted your happy customer can walk out the door with their newly purchased guitar, and you receive funds from the lender through direct deposit.
The whole application and approval process only takes about 3-5 minutes. Most lenders will even provide the ability for applications to be filled out by your customer from the comfort of their home. By having a link or page on your website, a prospective buyer can get approval for the loan before they even arrive at your store.
How Do I Get Started?
Summit Lending is ready to pair you with our partners for consumer financing. Simply give us a call or submit a request. One of our team members will get you started with the necessary paperwork, and provide guidance on how to benefit and market consumer financing.