How to Offer Customer Financing & Buy Now, Pay Later in 5 Steps
Meaghan has provided content and guidance for indie retailers as the editor for a number of retail publications and a speaker at trade shows. She is Fit Small Business’s authority on retail and ecommerce.
Brigitte is a retail specialist and staff writer with brick and mortar management experience. She is versed in retail sales analysis, merchandising, and buying with an emphasis in retail sales and marketing across platforms. She has a BA in writing from Washington University, St. Louis.
This article is part of a larger series on Payments.
Customer financing is when customers pay for a product or service in installments or with store credit instead of paying the full amount upfront. Financing can be offered through the business itself or via a third-party financing partner like Klarna, Affirm, and ViaBill.
Because this financing happens at the point of purchase or point of sale (POS), it’s also referred to as POS loans. Offering POS loans can boost sales, increase conversions, improve customer loyalty, and drive repeat business.
Here’s how to offer customer financing in five steps:
1. Make Sure Customer Financing Is Right for Your Business
Customer financing can be complex, and it’s important to understand whether it’s a good fit for your business and customers. From the retailer’s perspective, customer financing is designed to convert a browser into a buyer. It’s primarily targeted at potential customers who are considering buying goods or services from your business but are deterred by the upfront payment.
When first introduced, customer financing was mostly used to help customers buy expensive things like cars and electronics. Now, however, it can be a great option for many types of purchases—large or small. Offering customer financing can help you grow your average order value (AOV), convert more shoppers, and increase customer loyalty. In fact, businesses that advertise pay-over-time messaging can see a 56% increase in AOV, according to a PayPal study.
How Financing Impacts the Customer Experience
Most financing options (especially for online retailers) are seamless, take less than a minute or two, and offer payment flexibility, so they create a positive customer shopping experience.
In general, a customer applies during the checkout process. They select the financing option where they would normally choose credit or debit. Most people will get approved in a matter of seconds.
Key concept
Some customer financing programs require a credit inquiry to approve customers, but most simply rely on a soft credit check—or no credit check at all—and financing won’t impact the applicant’s credit.
Once the shopper is approved, they will choose a payment plan. Some providers, as is the case with Klarna, offer multiple payment plan options spanning different periods with different monthly rates and annual percentage rates (APRs).
Alternatively, other providers will show the current APR, loan term, and monthly payment amounts with no additional options. Many POS financing companies offer zero interest, fee-free financing. These types of installment payments are commonly referred to as buy now, pay later (BNPL).
Buy Now, Pay Later (BNPL)
Buy Now, Pay Later is a kind of consumer financing offered by retailers through a third-party that allows shoppers to pay for purchases over time in monthly installments that are typically interest-free.
After choosing their plan and accepting the terms, the customer can make a down payment on the purchase (if applicable) and take the product home or await shipping. They’ll then be responsible for making regular payments according to the lender’s requirements until the item is paid in full plus APR.
Before you commit to in-house financing or a customer financing partner, evaluate whether your customers will actually benefit from the service. If your usual customers won’t qualify, or if the interest rates will be too high, POS financing may not be a good fit. Ask yourself these questions when evaluating your customers’ needs:
- Can your customers qualify? Some traditional financing companies require customers to be a prime or a prime-plus borrower. This typically means having a credit score above 650 with no recent negative credit events like bankruptcy or foreclosure. While low credit customer financing and no credit check customer financing options (such as BNPL) are also available, these may be more expensive for the merchant.
- Are there any spending requirements? Though less common, some financing platforms only offer financing to customers on purchases of $1,000 or more, while other order minimums are much lower. Consider whether each provider’s transaction minimum aligns with your products and AOVs.
- Will your customers actually use the financing? Offering a customer financing solution doesn’t make sense if your customers don’t like or use it. If the financing platform charges fees, requires a hard credit check, or doesn’t offer competitive interest rates, your customers may not be willing to enroll.
- What’s the cost of financing to your customers? Ensure your customers stay loyal by choosing a customer financing solution with competitive rates. Most customer financing firms offer customers APRs ranging from 5% to 20%, but some go as high as 30%. The best options offer 0% financing with no fees.
How Financing Impacts Retailers
Retailers that offer customer financing through a third-party platform receive the entire purchase price upfront—except for a standard transaction fee that is the same or slightly higher than your typical credit card processing fee. POS financing partners also protect retailers from the risk of nonpayment and fraud while providing seamless integration with most POS and ecommerce platforms.
On the other hand, businesses that offer in-house financing only receive the down payment at checkout and must manage collections as part of their accounts receivable. In-house financing also opens retailers up to greater risk and can eliminate a business’ narrow profit margins. For most small businesses, it makes sense to partner with a third-party financing platform.
If the cost of offering customer financing is too high, accepting credit cards is another straightforward way to let customers finance products themselves. Not only do they offer customers a convenient way to make purchases, but credit cards and other merchant services are also flexible enough to integrate across all of your sales platforms.
2. Decide What Kind of Financing to Offer
Once you decide point-of-sale financing will serve your customers, determine what kind of program to offer them. Customer financing can be either in-house, meaning financed by the business itself, or provided by a third-party platform like Afterpay or Klarna. In-house financing requires running credit checks, offering financing, and managing payment collection yourself—it also comes with more risk and legal responsibilities pertaining to consumer credit information.
The ideal type of financing for your business depends on a number of factors, including implementation, scalability, cost, and risk. Consider these factors when determining the type of customer financing program that’s right for you:
- Implementation: The best customer financing tools are easy to implement and don’t involve a lot of training for employees. Financing should also be intuitive for your customers and not substantially interfere with the checkout process. Keep in mind that in-house financing will likely require growing your accounts receivable team.
- Scalability: Ideally, customer financing should help you increase sales as you grow across all platforms. This includes your brick-and-mortar store, ecommerce store, mobile events, and popup locations. If growth can’t be accomplished in-house, make sure the financing platform offers the tools your business needs to grow.
- Cost: Third-party financing companies charge merchants a percentage of each financed transaction, meaning the service can cut into a business’s bottom line. However, stores that offer in-house customer financing also see an initial drop in cash flow because they aren’t getting paid for financed purchases upfront.
- Risk: While there is always some risk in letting customers buy now and pay later, it is elevated for businesses that offer in-house financing. Generally, third-party financing providers protect businesses from much of this risk because they pay the merchants in full. But, depending on the provider, there can be risk of nonpayment.
- Flexibility: Some customer financing platforms impose limitations on what can be financed. In general, however, they give customers the flexibility to finance even smaller purchases that stores might not be willing to finance in-house. Consider your prices and AOVs when deciding how to offer customer financing.
3. Choose a Financing Provider
Once you’ve determined customer financing is a good fit for your business and decided what kind of financing to offer, you can choose a provider. Click through the tabs below to learn more about some of your options.
PayPal is a great third-party option for customer financing. (source: PayPal)
PayPal offers two financing options with its standard online checkout: PayPal Credit and Pay in Four. PayPal Credit offers interest-free financing where shoppers pay off their purchases in six months. Pay in Four offers interest-free installment payments over four months. Customers are able to choose the option that best fits their needs at checkout. PayPal Credit and Pay in Four work with BigCommerce, WooCommerce, Magento, and other popular ecommerce platforms.
Did you know?
Customers are 64% more likely to purchase with a retailer that offers interest-free financing options at checkout.
PayPal also has over 377 million active users globally, so it’s easy for shoppers to check out using PayPal. When a customer makes a purchase using PayPal Credit or Pay in Four, retailers just pay their standard PayPal transaction fee, which is typically somewhere from 1.9% to 3.5% of each transaction, plus a fixed fee ranging from 5 cents to 49 cents.
ViaBill is built into your online checkout, making it easy for customers to choose a financing option. (Source: ViaBill)
ViaBill makes it easy to manage your financed purchases from your ViaBill Dashboard. (Source: ViaBill)
ViaBill is a financing platform that lets shoppers pay for purchases in four installments that are charged over the course of several months—unlike with PayPal, this is the only financing option customers have. Shoppers don’t pay any interest and aren’t subject to a credit check. Retailers pay a 30-cent transaction fee plus 2.9% of each transaction value, which is lower than most customer financing options on the market.
Using ViaBill, retailers can increase their AOV by 33% on average and increase their conversion rates by 18%. And, like other customer financing platforms, ViaBill integrates with ecommerce platforms like Shopify, Magento, and WooCommerce. There is also a user-friendly retailer dashboard that makes it easy to manage your financed transactions.
Klarna offers your customers multiple financing options so everyone is sure to find a plan that fits their needs. (source: Klarna)
Klarna is one of the largest financing companies on the market with over 250,000 partners and more than 2 million daily transactions. It offers customers flexible financing options ranging from four interest-free payments to pay-in-30-days to payment plans that span six to 36 months. You can also market Klarna throughout your site so customers are informed and know their buying options from the start.
Transaction fees vary based on the type of financing and whether purchases are made in-store or online. However, each transaction comes with a 30-cent fee plus a variable fee ranging up to 5.99% online and 3.29% in-store.
Did you know?
Retailers can see a 41% increase in AOV and a 30% increase in conversion rates using Klarna.
Like other customer financing platforms, Klarna eliminates credit and fraud risk while letting businesses get paid upfront. Plus, the user dashboard makes it easy to manage orders, refunds, and disputes. Klarna is also easy to integrate with ecommerce partners like Shopify, WooCommerce, Magento, and BigCommerce.
Afterpay makes it easy for you and customers to use financing options. (source: Afterpay)
Afterpay is a fintech company that offers retailers zero interest customer financing. On average, 90% of shoppers are approved for financing, so you don’t have to worry about accessibility for your customers. When purchasing an item, customers make their first of four payments at checkout, and the remaining three are made over the course of six weeks. Afterpay does not offer alternate payment plan options at this time.
Participating retailers can take advantage of the platform’s flexible POS and ecommerce integrations and typically see a 22% increase in cart conversion. Because of the low cost and convenience of financing, Afterpay also yields more repeat customers and can increase AOVs by up to 40%.
For online purchases, Afterpay charges a flat fee of 30 cents and a commission that varies with the value and volume of transactions processed using Afterpay. Basically, the more you sell in both volume and value, the lower the percentage fee will be. Afterpay’s merchant fees range from about 4% to 6%.
4. Integrate Financing Across Sales Channels
Regardless of whether you opt for in-house or outsourced financing, you’ll need to add the payment option to all of your sales channels. This means using a POS system that lets you program your own financing options or integrate with a third-party financing platform. Likewise, online retailers should incorporate financing options into product listings and the checkout process.
Integrating financing options with your product pages is a great way to boost the conversion rate. (Source: Klarna)
The best POS financing partners make it easy to integrate with the top POS and ecommerce platforms, so you can streamline checkout and keep all of your sales data in one place. You should work to integrate your financing options with your
- In-store POS: Allow customers to opt for a financing option for in-store purchases by integrating your financing option with your POS system.
- Website checkout: Add your third-party or in-house financing option as a payment option to your checkout page, just like you would with Apple Pay, Debit, or Credit.
- Online product pages: It is best to display both the list price and the financing monthly rate so that customers can see that they can afford an item as they view it.
Key Concept
Klarna, PayPal, ViaBill, and Afterpay—all the options we explored in this article—allow you to integrate their financing options with your product pages. As we will explore below, this integration can boost your conversion rates massively.
5. Advertise Your Financing Options to Your Customers
After all of the leg work is done, it’s time to share your new financing options with your customers. Prominently advertise financing in your store, on your website, and across social media so that customers know about the option upfront. This strategy can turn passive browsers into buyers, especially when it comes to big-ticket purchases and online shopping. Incorporating financing into your marketing strategy can also encourage shoppers to choose your brand over competitors.
You will also want to be sure that you train your employees to execute a financed purchase on your POS system and mention financing options at checkout and when working with customers.
Pros & Cons of Offering Consumer Financing
Customer financing can offer merchants a number of benefits, from the ability to compete with larger retailers to increased customer satisfaction and retention. However, there are some risks associated with customer financing, and it may lead to more complex accounting requirements for your business.
Customer Financing Landscape
Customer financing has been around for years; however, use cases have been expanding in the last few. Where customer financing used to only exist for large purchases, like cars or home projects, it is now being used for all kinds of transactions, big and small. Here we will take a look at how customers are using customer financing as it is becoming more common.
- Use is increasing: Between 2015 and 2019, outstanding money in POS loans more than doubled, with an estimated total of $10 billion in 2019.
- Small ticket loans are growing rapidly: Small-ticket (less than $500) POS loans are growing at rates exceeding 40% to 50%.
- Customers plan to finance large purchases in advance: Approximately 75% of consumers who finance large-ticket purchases plan to do so before the actual purchase.
- Financing options are displayed throughout a website: A study from McKinsey & Company found that when you display that you offer financing throughout your site (as opposed to just at checkout), customers are two to three times more likely to make their purchase. That grows exponentially when compared to not advertising your financing options at all.
- New people are trying financing options: According to Klarna, up to 40% of its sales are with new customers.
- Use will continue to increase: The BNPL industry is anticipated to hit $680 billion in transaction volume worldwide in 2025, up from $285 billion in 2018.
- Consumers choose financing to avoid interest: The top reason that shoppers choose to finance their purchases is to avoid credit card interest. A close second is to afford products they wouldn’t be able to otherwise.
- More than half of consumers have used BNPL: This year, 55.8% of consumers had used a BNPL service, up from 37.65% in July 2020—an increase of almost 50% in less than a year.
- Some BNPL users incur fees and late payments: Just over 30% of BNPL users have made a late payment or incurred a late fee; 36% say they are at least somewhat likely to make a late payment within the next year.
- PayPal is the most used financing option: PayPal’s BNPL services are the most commonly used among providers, with 43% of users saying they’ve used the brand’s BNPL options.
- Ecommerce sales are increasingly BNPL: By 2024, BNPL sales will account for 13% of all online purchases.
Bottom Line
In today’s economic climate, many customers don’t have the funds necessary to make large purchases. Customer financing gives shoppers the ability to pay off large purchases over time while increasing your store’s sales and transaction values. Make the most of customer financing by choosing a POS financing partner that meets the needs of your business and its customers.
