Customer Financing: Key Points to Consider

Read on for considerations you should make when offering customer financing for a small business.

What Is Customer Financing?

Customer financing options let consumers acquire goods or services from a business up-front without paying for them in full at time of purchase. For example, if you’ve ever purchased a new mobile phone that you paid for on a payment plan, the business you obtained the phone from offered customer financing.

You might be asking, “When does the customer pay me if not at the time of sale?” What happens is that a third-party consumer financing company pays you, not the customer.


The financing company pays you for the product or service up-front, and your customer pays the financing company back in installments on a payment plan. That means that a customer on a limited budgeted doesn’t have to wait to get his or her hands on your latest products and sales.

At the same time, your business benefits from increased sales. It’s a win-win.


There are 2 different ways that the financing company typically charges merchants:
Discount Rate
Many financing companies charge small business owners a percentage (1% – 5% is typical, but it can be higher) of each financed transaction. For example, if a customer receives financing to purchase a $5,000 sofa from your shop, a discount rate of 3% is applied and $150 is deducted from the purchase. You would receive $4,850 but your customer owes $5K, plus interest.

Flat Rate

Some firms charge a flat monthly rate which covers an unlimited number of customer applications for financing. The average is around $40-50 per month. There may also be a one-time initial setup fee.
While a flat rate may be acceptable to your business, a discount rate might be tough depending on your margins.


Is It Suitable For Your Business Offering And Target Consumer?

The first factor to consider when offering customer financing for your small business is whether it makes sense for the products or services you offer.


Do you offer relatively inexpensive products or services or bigger ticket products or services? And how much of your target consumer has the funds to pay for these products or services up-front?


You might want to offer customer financing if your average buyer would be hesitant or unable to acquire your goods and services without a payment plan because of cost.

Will Consumer Financing Companies Approve Your Target Consumer?


In order to participate in a payment plan, your customers will have to apply for financing with the consumer financing company you’ve chosen. Usually, customers will need a decent credit rating to qualify for financing.

You should research the credit requirements of various consumer financing companies and determine whether your average target consumer would qualify for financing or not.

Are Your Products Or Services Eligible For A Payment Plan?

Consumer financing companies don’t permit products or services of all types or costs to be paid in installments. For example, a finance company may have a minimum fee threshold before they accept financing.

Products or services below that threshold might not be eligible to be paid for in installments. This is why it’s important to check whether the types and costs of goods or services you’re offering are eligible for the payment plans offered by the financing company you choose.

What’s The Cost Of Customer Financing?

You should only offer customer financing for your small business if both you and your customers can afford it. The cost of implementing a customer financing program to you the merchant depends on which consumer financing company you use.

The cost to your customer of using customer financing usually comes down to the amount of each installment and the interest. Be mindful that customer financing options with high-interest rates can place an undue financial burden on your customers.

How Easy Is It To Set Up?

Setting up a customer financing option should be painless for you the merchant. In addition, applying for customer financing and enrolling in a payment plan should be painless for your customers.

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