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How small businesses can offer financing to their customers

When shoppers know they can buy what they want at a fraction of the total amount due at checkout, they may be more likely to make a purchase. After all, who wants to limit their shopping to payday when they can enjoy their new goodies immediately?

Delivering more customer service and flexibility is a no-brainer. And given the competitiveness of the retail and service landscapes, businesses need to explore every possible tactic to keep sales rolling in.

But here’s the problem: No small business wants to leave itself out of pocket. That’s where Buy Now Pay Later (BNPL) comes in.

In this article, we’ll cover things you should know before offering customer financing — from the way it works to choosing the right third-party provider for your business.

What is customer financing, and why should you offer it to customers?

Customer financing is when businesses allow customers to pay for their purchases in installments over time rather than the total amount upfront. For example, instead of paying $500 for a new couch when checking out, they may make five monthly payments of $100.

With customers having more businesses to choose from than ever before, they’ve grown to prioritize those that provide maximum flexibility and convenience. This means digital tactics like customer financing can help increase sales, drive customer loyalty, and improve conversion rates.

How to offer financing to customers

The first step is to choose between in-house customer financing or third-party financing providers.

In-house customer financing

In-house customer financing is when a business offers financing directly to its customers.

While you can save on potential fees that third-party financing providers may charge, businesses should expect more work alongside greater risk — if you don’t have the proper infrastructure verifying that customers are creditworthy, you risk drowning in outstanding payments.

Follow these steps to offer in-house customer financing:

  1. Set up financing plans. Determine the details of your different financing plans, including fixed or variable interest rates, term lengths, and payment schedules.
  2. Track monthly payments, so you can accurately collect interest on late payments.
  3. Train your team (and eventually grow it). You’ll need to onboard your account receivables team, so they are prepared to manage and track the in-house financing process.
  4. Prepare for an initial drop in cash flow, since you aren’t getting paid for financed purchases upfront. Make sure you have a plan to offset this short-term drop.

Third-party financing providers

Third-party financing providers offer e-commerce financing options for customers and collect payments on your behalf. They can be your current payment processor or fintech businesses like PayPal, Klarna, or Afterpay.

The best part about third-party financing providers? You, the business, will still receive the full payment when the customer makes the purchase.

With so many different third-party financing providers to choose from, make sure you evaluate your options using these tips:

  • Compare costs. Some providers may require monthly payments to offer financing, while others may only charge a fee per transaction. Also, check for startup fees and integration costs.
  • Determine their ease of use. Look for a provider that is easy for customers to use, charges low or no customer fees, and has a speedy application process. It should be able to display a customer’s payment schedule at checkout so they know how much they will owe and when.
  • Check for geographical restrictions. Not all installment financing options are available in all countries. Check with your provider to ensure it can serve the markets where your audience tends to shop.

Top benefits of offering customer financing

When you offer financing to customers, you can enjoy upsides, from additional revenue to an increase in average order value.

Bring in additional revenue for your business

By offering flexible payments, you can reach customers who are in the market for what you sell but can’t currently afford your product, whether because they don’t own credit cards, have maxed out their credit line, or are budget conscious.

By helping them get over that immediate financial hump, you’ll be able to bring in more revenue and sales from those who would’ve otherwise passed on your product. One study suggests that BNPL programs can boost conversion rates by 20-30%.1

Stay competitive with big-box retailers

Many large businesses today offer financing to customers, so if you don’t have a BNPL program, you may be missing out.

The key to staying competitive with large competitors is researching their financing terms and seeing if you can offer a better deal.

Potentially increase the value of sales

Research suggests that customer financing typically increases the average order size per customer by 30% to 50%.1

Customer financing works particularly well with upselling tactics, where shoppers are more willing to make add-on purchases thanks to the unexpectedly lower upfront payment. They may also be more inclined to upgrade to pricier products that they can afford to pay for over time.

How to integrate customer financing

Ready to offer financing to customers? The key is integrating the payment option into all your sales channels — after all, you want to provide a consistent customer experience no matter where people shop.

Many providers have pre-built integrations that let you offer financing with just a few clicks.

If you're already on an e-commerce platform, check for existing integrations between your payment provider and commerce platform. Otherwise, you may need to implement a separate provider.

Here are some sales channels to get you started:

  • In-store POS. Integrating your customer financing options with your POS systems can empower customers to make stress-free purchases in-store. Just make sure you’re marketing all your financing options with prominent signage throughout the store and at the checkout counter.
  • Product listings. Consider adding messaging on each product page that automatically calculates and displays installment payments for a given item. This lets browsing shoppers know precisely what they will owe for each payment period while helping your product appear more affordable.
  • Checkout pages. Adding your financing options to checkout pages alongside other payment options (like Apple Pay or credit card) can help convert potential cart abandoners.

If you’re already using PayPal to receive payments and are looking to offer financing to customers, you can integrate PayPal's Buy Now Pay Later into your POS system and website checkout.

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