How to Tell if Consumer Financing is Right for You
Consumer Financing can be a great way for a small business to compete with national stores, close sales for customers who are on the fence about buying, and grow repeat business all at once! There are several factors that determine if it will benefit your business. Here are the major questions to ask yourself about a consumer financing program.
Will Your Customers and Inventory Qualify?
Generally, successful applicants for consumer financing need a credit score of 650 or above. You will need to consider the socioeconomic background of your current and target customers. If you’re selling high-end products, this likely won’t be a major concern. If you’re selling items to younger people without established credit, or poor credit, they likely won’t qualify, forcing you to waste time and money.
It’s also important to keep in mind that some financers will require a minimum transaction of $1000 to even consider financing. Other financers specialize solely on one product category, like furniture. You need to have a clear understanding of the finance company’s business model.
How Much Will Financing Cost You?
This aspect may be the most important one when deciding if consumer financing is right for your business. There are typically three ways that financing companies charge businesses. The first is a “no charge” model, completely free to businesses. This option generally is a package deal with the existing contract for your point of sales system. The second is a “discount rate” model, where the business pays the finance company a percentage of each financed transaction, typically between 1% and 5%. The last is a “flat rate” model where the merchant pays a fixed fee each month for the finance service, often with an initial setup fee.
How Difficult Will it be to Implement?
You’ll have to train and incentivize your employees to offer financing. If this is done at the point of sale, it may slow down your checkout process considerably, and if employees find it too burdensome, they may not do it or they may not do it well.
Technical considerations like point of sale functionality and internet speed also factor in to implementation.
Will Your Customers Take Advantage of it?
The final question for businesses considering consumer financing is this: If you offer it, will customers sign up for it? You’ll have to find a way to gauge interest before launching a financing program. Otherwise, it may be a waste of time and money.
Consumer financing has many upsides. Business owners must examine their model with these questions to determine if it will work for them.