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.
Offering customer financing at the point of purchase can boost sales, increase conversions, improve customer loyalty, and drive repeat business. In fact, businesses that advertise pay-over-time messaging can see a 56% increase in average order value—all while reducing the merchant’s credit and fraud risk. That said, customer financing can be complex and it’s important to understand whether it’s a good fit for your business and your customers.
How Customer Financing Works
From the retailer 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. Offering customer financing can help you make larger sales, conduct sales more often, and increase customer loyalty.
In general, a customer who opts into financing applies during the checkout process and gets approved almost instantly. Some customer financing programs require a credit inquiry to approve customers, but most simply rely on a soft credit check—or no credit check—and won’t impact the applicant’s credit.
Depending on the financing platform, the shopper may then get to choose from multiple repayment plans, as is the case with Klarna. Alternatively, they’ll be shown the current annual percentage rate (APR), loan term, and monthly payment amount. Many point-of-sale (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. As of March 2021, 55.8% of consumers have used a BNPL service.
After 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.
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. Point-of-sale 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 platform to offer financing or installment payment plans.
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.
How to Offer Customer Financing
Follow these steps if you think customer financing is a good fit for your business:
1. Evaluate Your Customers’ Needs
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, point-of-sale 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? 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 average order values (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 annual percentage rates (APRs) ranging from 5% to 20%, but some are as high as 30%. The best options offer 0% financing with no fees.
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 at your brick-and-mortar store, ecommerce store, mobile events, and popup locations. If this 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’ 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, but there is still some 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 average order values when deciding how to offer customer financing.
3. Choose a Financing Provider
PayPal offers two financing options with its standard online checkout: PayPal Credit and Pay in 4. PayPal Credit offers interest-free financing when shoppers pay off their purchases in six months. Pay in 4 offers interest-free installment payments over four months. PayPal Credit and Pay in 4 work with BigCommerce, WooCommerce, Magento, and other popular ecommerce platforms.
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 checkout using PayPal. When a customer makes a purchase using PayPal Credit or Pay in 4, retailers just pay their standard PayPal transaction fee, which is typically 2.9% + 30 cents.
Founded in 2014, ViaBill is a financing platform that lets shoppers pay for purchases in four installments that are charged over the course of several months. 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. The dashboard appears user-friendly, and users report being satisfied with the low fees and helpful customer support.
Klarna offers customers flexible financing options ranging from four interest-free payments to financing for larger purchases and a pay-in-30-days option. The cost to retailers varies 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. Retailers can see a 41% increase in average order value 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 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.
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 average order values by up to 40%. Retailer pricing is not available through Afterpay’s website, but some platforms report that the service charges 30 cents plus 4% to 6% of each transaction value.
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.
The best point-of-sale 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.
5. Share Financing Options With 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.
If you have an online store, use product listings to display standard product prices and prices shoppers pay upfront with financing. Also, offer financing to customers as a payment option at checkout, the same way you would display PayPal or Apple Pay.
If you’re selling in-store, arrange signage throughout the sales floor to promote financing. Also post signs at the point-of-purchase and train associates to inform customers of the option at checkout.
Pros and 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.
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 point-of-sale financing partner that meets the needs of your business and its customers.