Consumer Financing Guide for Small Business Owners

Source: Finance Derivative

In 2010, a dramatic shift occurred in eCommerce, marking a rapid growth in online shopping. For the first time, online purchases surpassed $1 billion during Cyber Monday.

Once again, purchasing preferences are changing with an increase in buy now, pay later (BNPL) options and consumer financing platforms. Consumer financing gives individuals more freedom and transparency, allowing them to make purchases the same day while paying in monthly installments over time.

The shift in how individuals pay for goods and services is already evident as 36% of consumers use BNPL at least once a month, with roughly 9% using the service more than once a week.

Although larger companies took the initial lead to incorporate consumer financing options, currently, small businesses are following suit and adopting BNPL services. As a result, nearly 30% of small-to-medium businesses are now offering point-of-sale financing, with noticeable improvements in average purchase value and 2% higher conversion rates.

Benefits of Offering Consumer Financing

By the end of 2022, the BNPL industry is expected to exceed $82 billion. This marks an annual increase of 66.5%. And it’s no wonder consumer financing is gaining more popularity since small businesses that incorporate these options enjoy the following benefits:

Customer Acquisition and Retention

Between 2020 and 2021, consumers utilizing BNPL services increased by 85%. With a growing consumer base, small businesses that offer consumer financing can tap into a larger client base. Also, as consumer preferences shift toward more flexibility and control over their payment methods, incorporating a consumer financing option can increase customer acquisition efforts.

Additionally, due to the flexibility and transparency, many more consumers are opting for BNPL services over credit cards, with 62% thinking this could become a permanent shift in how they pay for goods and services. In turn, small businesses that adapt to consumer buying behaviors improve the customer experience.

As a result, individuals who are satisfied with their BNPL services will likely return to a dependable small business that offers quality products and services with quick payment options. For instance, 76% of consumers in the U.S. are more likely to make retail purchases if they are offered a hassle-free BNPL option.

Increased Sales

Paying in smaller monthly installments may be more flexible and budget-friendly for your consumers than a large, upfront sum. And this is evident as conversion rates and incremental sales have increased by 20% to 30% for small businesses that have implemented consumer financing.

Higher Sales Volume and Value

Moreover, BNPL services also incentivize add-on purchases and larger ticket sales. For instance, the average purchase value for consumers using BNPL options is $689.

Moreover, the average order size increased by 15% for small businesses that implemented a consumer financing platform. These increases are largely due to consumers stating that a flexible consumer financing option was the reason they made a purchase.

Competitiveness

Although BNPL is slowly being adopted by small-to-medium businesses, integrating a consumer financing platform will give you a significant advantage. Offering consumers flexible payment options can put your small business one step ahead of local retailers or service providers who have not yet explored BNPL services.

How to Offer Consumer Financing as a Small Business

If you’ve made the executive decision to offer consumer financing, there are two main ways you can implement this service: in-house or via a third party.

In-house Consumer Financing

With an in-house consumer financing program, your small business will offer its own financing options like a lender. Typically, in-house financing is more complicated because it requires small businesses to:

• Conduct credit checks and pay associated costs
• Collect payments and set up collection schedules
• Monitor accounts receivable
• Acquire the software and staff for consumer financing
• Develop a credit policy
• Abide by legal and data security regulations

In-house financing puts more power in the hands of small businesses, allowing them to develop and manage all aspects of consumer financing. However, this added control comes with higher implementation costs, legal responsibilities, and effort.

Third-party Consumer Financing

Alternatively, small businesses can opt for consumer financing through third-party providers, which decreases the costs and risks for your company. Third-party providers assume many of the time-consuming, risky, and costly aspects of consumer financing, including credit checks, legal responsibilities, and repayment schedules.

The small business will likely pay a fee for each consumer financing transaction processed by the third party but won’t have to assume any other funding or check verification obligations. Instead, the consumer will pay the third-party provider directly. In turn, the funds will be transferred directly and in full to the retailer or service provider within a few days.

Once you choose a third-party provider, you will need to implement an online form that allows your consumers to apply for financing. The customer’s financial and personal information is then routed to the service provider, who conducts credit and eligibility verifications. If the client is approved for financing, they agree to the repayment terms and interest rates with the provider. In turn, your small business can complete the sale the same day.

Cost of Offering Consumer Financing

The cost of implementing consumer financing will largely depend on the type of program your small business will implement: in-house or third-party. As mentioned previously, in-house consumer financing will be significantly more expensive, as you will need to assume all the responsibilities of BNPL services, including credit check costs, late payments, processing software, and personnel.

Conversely, third-party consumer financing will likely be less expensive since the provider assumes most of the risks and already has the software and personnel in place to fund consumers. Nevertheless, when partnering with third-party providers, your small business will still need to pay a fee per transaction.

Most third-party providers charge between 2% and 6% per transaction, plus a fixed cost of $0.20 to $0.30. Other providers may also charge an additional flat monthly fee to maintain the online software your consumers use to submit a funding request.

Consumer Financing Factors to Consider

Despite the many benefits consumer financing offers small businesses, several factors must be considered before taking the step towards implementation.

1. If you partner with a third-party provider, your customers may need to meet specific credit score requirements. In some cases, financers only work with applicants with credit scores above 650.
2. Some third-party providers may also institute minimum spending requirements, only offering financing to consumers who spend over a few hundred or thousand dollars. Additionally, these providers may attach high-interest rates for financing. Although, many third-party financiers are beginning to offer zero interest or low APR to attract more consumers.
3. When working with third-party provider software, small businesses need to make sure the platform is compatible with existing systems. This will include online eCommerce shops and brick-and-mortar stores.

Conclusion

Undoubtedly, consumer financing and BNPL services are gaining more traction. And it comes as no surprise with the win-win for consumers and small businesses. Particularly, consumers are given more flexibility to pay for larger ticket items in monthly installments, sometimes with zero interest. Similarly, small businesses boost customer acquisition and retention efforts, higher sales and purchase value, and overall competition.