In the past, you could use financing to increase your business's revenue and profits. Today, however, many businesses are struggling to gain much-needed cash flow because of credit tightening and other factors. For that reason, you must be careful before offering financing to residential customers. If done right, you can boost your business' cash flow while also finding new ways to grow it over time. But if done wrong—or without proper planning—you could end up losing money rather than earning it!
What is customer financing?
Customer financing is a way for customers to pay for products or services over time. It can be offered by the company itself as Primary Financing or by a Third-party Financing company, and it can be used for any type of product or service. Customer financing is often used in situations where you need immediate cash flow but don't have enough money in your account at the time of purchase.
Primary financing.
Primary financing is when you lend money directly to the customer. This can be a benefit because your company can earn interest off this loan, or you can offer your customer 0% to allow them to pay over time which will help you close the sale.
Third-party financing is a loan that the customer gets from a bank or other lender. Customers who have bad credit scores or don't have enough money for a down payment might not qualify for third-party financing at all (or they'll have to pay higher interest rates). If this describes your customers' situation, then you could still be able to offer them financing through your own company!
If none of those options work out - the end user could try looking at credit unions instead! Credit unions tend to not only offer lower rates but also better terms than banks do because they're smaller institutions with closer relationships with the homeowners.
Things to consider before offering financing to your customers
To offer financing to your customers, you need to understand the market and product. You should also understand your own financial position, capabilities, and risks involved in offering financing.
In addition to this, you should be aware of any legal issues that may arise from offering financing.
Finally, it's also important that you understand the types of financing options available to your customers to help guide them towards the best option for them.
Pros of offering customer financing
Pros:
- You can offer more affordable options for your customers. This is especially helpful if your products are more expensive than the competition's or if interest rates are high in your area for third-party loans.
- You can get more sales from existing customers by allowing them to pay over time (instead of just paying one lump sum).
Drawbacks of customer financing
Customer financing can be a great way to help customers get the service they want, but it also has its drawbacks.
- They must be able to afford the financing. If they don't have enough cash flow to pay the bill monthly (or over time), then you shouldn't offer that customer financing.
- They need to have a good credit rating. Without this, you shouldn't trust their ability to pay back loans on time and in full each month!
How much does customer financing cost?
The cost of customer financing depends on the type of financing you offer and how much your customer is borrowing. If you are offering a short-term loan with an interest rate that's higher than what they could get from another source, such as a credit card or bank, then there's no reason for them to use your financing program. In this case, it would be better for them to apply elsewhere if they want to take out a loan.
If you offer low-interest rates and flexible terms (such as allowing customers to pay off their balances over a long period of time) then your customer has a good reason to choose your company over others when they need money for their project! They may also come back again later when they need another project done because they trust that working with you will be easy and convenient compared with going through other dealers that they know nothing about.
A well-thought-out approach can help you reap rewards when offering customer financing
Like we've said, you can offer customer financing, but how you do it will depend on your company and what works best for your situation. In-house financing is ideal if you have the infrastructure and expertise to handle the process yourself. Third-party financing is easier and requires less work on your part compared with primary financing, which offers flexibility in terms of interest rates and fees charged to customers. Which approach is best for your business?
Conclusion
We hope that this article has helped you understand how customer financing works and if it might be a good option for your business to consider. As with any financial decision, it's important to weigh all of the pros and cons before making a choice. If you decide that customer financing is right for your company, we encourage you to take steps toward implementing it only when you are absolutely ready. Once you do, you'll be amazed how quickly you can close deals and increase your company's cash flow.
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