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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.

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Business

How can businesses make the cloud optional in their operations?

Max Alexander, Co-founder at Ditto

Modern business apps are built to be cloud-dependent. This is great for accessing limitless compute and data storage capabilities but when connection to the cloud is poor or shuts down, business apps stop working, impacting revenue and service. If real-time data is needed for quick decision-making in fields like healthcare, a stalled app can potentially put people in life-threatening situations.

Organisations in sectors as diverse as airlines, fast food retail, and ecommerce that have deskless staff who need digital tools accessible on smartphones, tablets and other devices to do their jobs. But because of widespread connectivity issues and outages, these organisations are beginning to consider how to ensure these tools can operate reliably when the cloud is not accessible. 

The short answer is that building applications with a local-first architecture can help to ensure that they remain functional when disconnected from the internet. But then, why are not all apps built this way? The simple answer is that building and deploying cloud-only applications is much easier as ready-made tools for developers help expedite a lot of the backend building process. The more complex answer is that a local-first architecture solves the issue of offline data accessibility but does not solve the critical issue of offline data synchronisation. Apps disconnected from the internet still have no way to share data across devices. That is where peer-to-peer data sync and mesh networking come into play.

Combining offline-first architecture with peer-to-peer data sync

In the real world, what does an application like this look like?

  • Apps must prioritise local data sync. Rather than sending data to a remote server, applications must be able to write data using its local database in the first instance, and then listen for changes from other devices, and recombine them as needed. Apps should utilise local transports such as Bluetooth Low Energy (BLE) and Peer-to-Peer WiFi (P2P Wi-Fi) to communicate data changes in the event that the internet, local server, or the cloud is not available.
  • Devices are capable of creating real-time mesh networks. Nearby devices should be able to discover, communicate, and maintain constant connections with devices in areas of limited or no connectivity.
  • Seamlessly transition from online to offline (and vice versa). Combining local sync with mesh networking means that devices in the same mesh are constantly updating a local version of the database and opportunistically syncing those changes with the cloud when it is available.
  • Partitioned between large peer and small peer mesh networks to not overwhelm smaller networks if they try to sync every piece of data. In order to do this, smaller networks will only sync the data that it requests, so developers have complete control over bandwidth usage and storage. This is vital when connectivity is erratic or critical data needs prioritising. Whereas, the larger networks sync as much data as they can, which is when there is full access to cloud-based systems.
  • Ad-hoc to enable devices to join and leave the mesh when they need to. This also means that there can be no central server other devices are relying on.
  • Compatible with all data at any time. All devices should account for incoming data with different schemas. In this way, if a device is offline and running an outdated app version, for example, it still must be able to read new data and sync.

Peer-to-peer sync and mesh networking in practice

Let us take a look at a point-of-sale application in the fast-paced environment of a quick-service restaurant. When an order is taken at a kiosk or counter, that data must travel hundreds of miles to a data centre to arrive at a device four metres away in the kitchen. This is an inefficient process and can slow down or even halt operations, especially if there is an internet outage or any issues with the cloud.

A major fast-food restaurant in the US has already modernised its point of sale system using this new architecture and created one that can move order data between store devices independently of an internet connection. As such, this system is much more resilient in the face of outages, ensuring employees can always deliver best-in-class service, regardless of internet connectivity.

The vast power of cloud-optional computing is showcased in healthcare situations in rural areas in developing countries. By using both peer-to-peer data sync and mesh networking, essential healthcare applications can share critical health information without the Internet or a connection to the cloud. This means that healthcare workers in disconnected environments can now quickly process information and share it with relevant colleagues, empowering faster reaction times that can save lives.

Although the shift from cloud-only to cloud-optional is subtle and will not be obvious to end users, it really is a fundamental paradigm shift. This move provides a number of business opportunities for increasing revenue and efficiencies and helps ensure sustained service for customers.

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Business

When something personal fills an important gap in the market 

by Cécile Mazuet-Eller, founder of NameSwitch

There aren’t many business ideas that go from a personal experience to filling an important gap in the market. However, this is certainly the case for NameSwitch, the UK’s pioneering and only name changing support service launched in 2018. But what inspired its inception and what challenges did it face? Here, Cécile Mazuet-Eller, the founder of the company, in its seventh year, explains.

My entrepreneurial journey is a bit unusual in that it started from my own experience of going through a divorce, which became a pivotal turning point for me not only emotionally, but practically too. I wanted to remove my married name, and I had a visceral reason to do so as I really didn’t want to keep it. Feeling extremely frustrated at still receiving letters and official documents featuring my previous name, I was desperate to change it but like for so many people it became a stop-start, arduous task.

Once I started the process, I realised it was taking up far too much time I didn’t have; being a single mum to two young children and working full-time is no mean feat, so when I embarked on the name changing process I realised it wasn’t going to be easy.  Searching for a solution to help, all I came up with was a service covering the US and Canada, but nothing that worked for the UK, so in the end, I spent a whole year to get everything changed that had to be, which proved long and stressful to say the least.

Nurturing the idea

In the early days I was fortunate enough to be surrounded by positive people who had good contacts, and who saw the viability of my idea. Living in a small community filled with intelligent and well-rounded people, I wasn’t short of encouragement from them and friends, who recognised as well as I did there was a definite gap in the market. Working with a web development team in Serbia which was also recommended, I enlisted additional help from a university student on some research.

I always wanted to run my own business, and there were several reasons why I needed to embark on something new. As the only breadwinner in the house, there were mounting bills while balancing the demands of motherhood and other financial responsibilities. Cash was limited but what little I had was used carefully which I put into the business.

In the early stages, which included the development of the unique technology that underpins the service, I carved pockets of time at night and on weekends to create a strong foundation for the business. Creating something completely from scratch was like a form of healing, which is why it was and remains such a personal project.

Mulling over the idea for at least two years following the original lightbulb moment, the business was registered in 2015, with time needed for building the robust platform in order to  create a viable product. Drawing on my previous experience, I investigated overseas equivalents, financials and marketing intelligence ensuring there was a genuine need for the service in the UK. Fortunately enough I was able to share my plans with my employer at the time, who turned out to be my biggest supporters, becoming my first paying customer who purchased a NameSwitch for his ex-wife, who was getting married to someone else!

With a career in telecommunications and a degree in marketing, I was already used to hard work and having the support and encouragement from my telecoms team was extremely helpful.   

Support and coaching

Coaching was an important element of the start-up process, obtained through a wider network and some financial support from family,  with no other funding or investment being available.

The challenges

Presented with certain obstacles like all businesses are, there was a lot to juggle and at times it felt like too much but I managed to navigate the complexities involved. When Covid hit that was a huge set-back, given that our biggest target market was and still is, newly-weds. With all weddings being banned, it hit NameSwitch hard, but our saving grace were the people who used the time to change their name’s in lockdown, by doing something they previously didn’t have time for. Being 100% employed by the business by this stage, it turned into a year of survival and another big challenge.  

In 2022-2023 we concentrated on growth for NameSwitch, when me and my dedicated team were satisfied with the service, it was time to consider investment into PR, advertising and partnerships to increase brand awareness to reach the revenues that were needed.

In 2022-2024, it was forecast that 285,000 – 415,000 weddings will take place resulting from the pandemic, which has reflected well on the business in recent years. And amidst the trials and tribulations it’s proved to be both exhilarating and exhausting in equal measure.

With hindsight, there are certain things I’d have done differently, such as bringing in a partner early on to put us in a stronger position sooner, and adding more resource  to improve growth, but I know that’s all part of the steep learning curve and something to take with me to projects in the future.

Advice for aspiring entrepreneurs

For anyone contemplating their own entrepreneurial endeavours, I’d recommend to ‘one hundred percent go for it’ – but do not bet the house on it and whatever happens, embrace the journey.

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Business

How relationships with work are changing

by Amrit Sandhar (CEO/ Founder, &Evolve)

Since Chris Argyris’s work in the 1960s into the psychological work contract, the assumption’s remained that it’s based on mutual exchange of beliefs and expectations of what employee and employer can expect from each other, given a contract only works with two parties agreeing to it.

But have we seen a shift in the balance of this contract, where the expectations of employees have really changed? Since the industrial revolution, organisations dictated employees’ working arrangements which focused on driving greater productivity and performance. This reflected the imbalance of power, with employees reliant on their organisations to structure working arrangements to drive the best results.

Employees signed up to this psychological contract, despite it representing an imbalance in favour of the employer. However, the pandemic stressed this equilibrium, which has led to many, reevaluating their relationship with their work.

While the pandemic has had a long-term impact on most, affecting everything from education to mental health, it could also be the cause of an evolution that’s changing people’s relationship with work. While organisations were supported through furlough schemes and government grants, employees took responsibility for keeping businesses going, by changing the way they worked. Employees took an unprecedented situation and found ways of dealing with it and since the first time in many years, employees had and took direct ownership of the success of the organisations they worked for – which changed everything.

We’ve seen a seismic shift in how we think about work since the that time, which goes far beyond submitting requests for flexible working. It shows that we’re at the threshold of realising a more balanced psychological work contract, driven by employees, who have different mutually agreed beliefs and expectations in how employees and employers work together.

Gone are the days when employees are only satisfied with financial reward and a nice manager. Gen Z will soon become the largest generation making up our workforce and while money is important to them (as they’re likely to be poorer than previous generations), many want work to be something that complements their life, and not something that only provides financial reward.

Some have said the generation gap is a myth, and before the pandemic this may have been true. But when a generation has experienced such a paradigm shift it brings a different mindset of beliefs and expectations about how work can and should be carried out.

It’s hard to see how anyone could go back to the previous way of working, which should have always focussed on outputs and outcomes rather than hours worked. Other than manufacturing, where it was easy to measure productivity, organisations have become complacent in measuring output and outcomes, with employees paying the price for this ambiguity.

Organisations utilising employee engagement surveys, listening forums, and employee representative initiatives often launch them with the best of intentions, however, the historical underlying imbalance of power towards employers, has prevented a more equitable relationship from forming, despite these initiatives. The strain some organisations are experiencing with mounting pressure to challenge how work is carried out, whether from expecting remote working to questioning if a four-day week would drive greater productivity, shows the shift taking place to the long-standing equilibrium of the psychological work contract.

Future successful organisations will be those that can attract and retain the best talent, and it’s unlikely that the next generation of employees will be willing to relinquish their courage to challenge how work is done.

Employees will seek a greater understanding of exactly what’s required of their role and expect organisations to clearly define measures, to understand how their value and success will be measured, regardless of when, where, and how they choose to work.

Rather than resisting change organisations should consider how they can shape it, by questioning and finding solutions to measuring outputs and productivity, by looking at how they help employees feel respected and valued, and how they help bring the psychological contract, based on a new set of mutually agreed expectations and beliefs to life.

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