As a small business owner, providing affordable prices to customers is crucial for staying competitive.
However, lowering prices to attract sales can negatively impact profitability, especially for businesses selling high-priced products or services.
Luckily, there is a solution: customer financing, also known as in-house financing. Customers can apply for credit in-store, reducing the chances of a broken sales funnel and boosting the likelihood of a successful transaction.
Vendors can quickly score clients and automatically make credit decisions anywhere on the globe utilizing the consumer lending platform CompassWay, which automates the loan origination process from application to funding for any loan product with advanced algorithms and analytics
Below, we provide a detailed guide to consumer financing, including information on the various types available.
We will also provide insight into the benefits and drawbacks of customer financing and how to use funding in-house with ready-made digital lending software.
Finally, we’ll help you decide whether offering customer financing is right for your business.
- What is In House Financing
- In-house financing option for small business
- Advantages and Disadvantages of In-House Financing
- How to In-House Finance with Ready-Made Lending Software
- What Is the cost of consumer financing?
- Should you offer customer financing?
- 1 What is In-House Financing?
- 2 In-House Financing Option for Small Business
- 3 How to In-House Finance with Commercial Loan Origination Software
- 4 Real-time Checks: ID Verification, Know Your Customer (KYC), Anti-money laundering (AML), credit history.
- 5 What Is The Cost Of Client Financing?
- 6 Should You Offer Customer Financing?
What is In-House Financing?
You don’t always rely on bank financing or high-interest credit cards when buying high-ticket items like necessary business equipment, furniture, or a car.
In-house financing is a great option where the retailer or vendor provides direct financing to customers.
The customer repays the loan over time with added interest and fees. With in-house financing, you don’t need to go through a third-party lender; the approval process is usually quick and easy.
In-house financing is popular at car dealerships, where you can apply on-site and get approved for a new or used vehicle on the same day.
Dental offices, electronics stores, home goods retailers, equipment suppliers, and home builders offer in-house financing programs.
In-House Financing Option for Small Business
In House Loans
If you’re a business that sells higher-priced goods or services, in-house financing may be a good fit for your business.
For instance, customers may want to finance furniture, appliances, electronics, or home improvements and repairs.
Customer financing is a business’s program or service to help consumers pay for products, goods, or services over time.
Usually, financing involves an application process where the customer’s overall credit risk is assessed with a credit check.
Offering a seamless checkout process that incorporates all stages of loan origination helps to increase the customer base with customers who would otherwise not make the purchase.
Many innovative retailers view technology-assisted in-house financing as a cost-effective and profitable alternative to expensive and complicated point-of-sale outsourcers, making in-house financing increasingly popular.
Layaway is a payment plan whereby a business reserves a product for a customer until the customer pays for the item, typically with partial payments.
Unlike other financing options, the customer does not receive the item until it has been paid for in full. The item will be returned to stock if the customer fails to complete payments.
The customer’s money may be returned in full, minus a fee, or forfeited, depending on the terms of the agreement.
Some businesses may charge a fee for holding the item until the customer completes payment.
Although layaway decreased in popularity with the rise of credit cards, it may still be an appealing option for some businesses and consumers.
Typically, a layaway agreement allows the customer to avoid interest charges while the item’s price remains fixed.
Layaway agreements reduce risks for the seller and can be offered to customers with poor credit.
Third-party financing refers to financing where small business owners rely on a third-party financing provider to act as a lender at the point of sale.
These third-party financiers allow customers to apply partial payments toward the cost of the purchased items and typically offer interest-free payment terms for a fee. Installment payments are often due on a biweekly or monthly basis.
Using third-party consumer financing, retailers will pay a fee for each transaction processed for funding or a flat monthly fee.
The benefit of using a third-party financing company is that they do much of the labor on the retailer’s behalf, so you don’t have to worry about completing credit checks or obtaining payments. And drawbacks of offering in-house financing.
We summarized some pros and cons below to simplify evaluating the advantages and disadvantages of consumer financing for small business owners.
Boost The Overall ROI
Customer financing can drive more sales, increase conversions, and enjoy improved marketing ROI.
In-house financing can make your products or services accessible to a broader customer base, including those with varying credit profiles, expanding your market reach.
This is further reinforced by customers’ ability to obtain loans relatively quickly. Furthermore, the terms and conditions of in-house financing can be tailored through negotiations between the seller and the buyer, including adjusting interest rates to suit individual needs.
Finally, depending on the financing model you choose, you may have the opportunity to earn interest or fees on the financing provided, adding a revenue stream to your business.
With Compassway’s in-house lending solution, you can boost the overall ROI of your retail business with total confidence.
Your product features will increase your average order value by 58%, increase the purchase frequency by 20% in one month, and increase your sales conversion rate by 44%.
Take control of your sales conversion rate and average order value, and confidently increase your intermediate purchase frequency in one month 20%. You also get 2-6% of all transaction charges and interests!
This can be a win-win situation for you and your customers, as they get the product they want, and you close sales on full-priced products and services.
Win Repeat Business
The goal of every business is to close more deals, make profits, and stay ahead of the competition.
Customers are more likely to return to you than another company when you offer them a flexible sale process.
Integrating additional in-house financing options makes the purchasing experience seamless and increases your chances of landing repeat business with existing customers.
Earn Customer Loyalty
When you offer an easy payment option for customers and deliver quality service, you increase your chance of earning their loyalty.
Financing can enhance your brand perception by signaling that your business is willing to work with customers to make purchases more affordable, which can positively impact your reputation. This is the best way to get them to buy from you again.
Not only does this mean more sales for your business, but it also means your customers are satisfied and happy with your business and may likely act as references or word-of-mouth referrals advertising your business to their friends and family free of charge!
Improve Customer Experience
Retail financing options reduce barriers to payment and empower your customers to buy more services and products easily. Customer satisfaction is essential to running a successful business.
When customers can pay installments for goods or services purchased, their satisfaction with your quality service delivery increases.
Interestingly, having multiple customer financing options improves the overall customer experience and creates room for repeat businesses in the future.
Compliance With Regulations
Compliance and Reporting should be integral parts of your operations. Recognizing the significance of adhering to evolving regulatory policies and maintaining accurate records, you must provide comprehensive and complete financial reports as governing authorities require.
Developing a contingency plan is prudent, considering evolving legislative and regulatory issues.
Adaptability is essential in a financial market; therefore, be ready to adjust your company plan if necessary.
Capital and Funding Investments
When embarking on an enterprise that involves in-house lending, it is paramount to establish the necessary working capital to cover the expenses associated with hiring and training personnel to provide exceptional customer service.
It is essential that your team understands the loan products and can efficiently assist clients, as this will guarantee sufficient funding to initiate the enterprise and keep it operating efficiently.
How to In-House Finance with Commercial Loan Origination Software
The only question remains how to follow the trends and what in-house financing software is good enough to improve your bottom line tomorrow.
With CompassWay, you can automate the entire stages of the in-house lending process – from managing loan applications and repayments to tracking overall business performance with regular reports and analytics.
Our all-in-one system provides everything your business needs to offer in-house lending to clients on your terms.
Here’s what you’ll get:
Fully Digital Processing
The digital lending platform lets you quickly issue a loan with zero paperwork. Faster loan approvals and releases will reduce the “time to yes” from weeks to minutes.
CompassWay is an all-in-one lending platform that automates the loan origination process from application to disbursement, delivering a best-in-class experience for your clients and team – for any loan product.
With advanced algorithms and analytics, vendors can quickly score clients and automatically make credit decisions anywhere on the globe.
Real-time Checks: ID Verification, Know Your Customer (KYC), Anti-money laundering (AML), credit history.
Digital lending software is equipped with tools to synchronize data from KYC registries, credit bureaus, banks, etc., to ensure that all uploaded data and documents are authenticated.
Decision rules and underwriting algorithms are then used to determine whether the loan application passes the checks and balances of risk.
Increased automation and robust back-end technology enable staff to be redeployed from reviewing loan applications to work that adds more value.
Real-time Risk Profiling
Risk management is the most critical aspect of a digital lending platform. The capacity to mitigate credit risk will prevent costly losses and preserve credit availability for deserving borrowers who will become or remain active participants in the economy.
The proprietary AI-driven technology of deep neural networks and machine learning allows making decisions about loans within 30 seconds.
CompassWay’s AI model analyses over 400 variables collected during the application process and sourced from third parties –from credit bureaus to social networks.
Internal and external data sources are used in a credit decision model and impact the quality of credit decisions.
The digital lending solution also gives you real-time insights into borrowers’ creditworthiness based on their credit scores.
A customizable scorecard based on recent cash flow information, total debt level, repayment history, and other factors is also crucial.
Using objective financial information and other factors correlated with risk allows for increased consistency across each company’s lending underwriting process.
Risk-based pricing has allowed lenders to serve consumers across the risk spectrum better.
Under this system, costs are lowered for most low-risk consumers while credit opportunities are expanded for higher-risk consumers. Risk-based pricing also creates a fairer marketplace.
Automate Marketing and Client Loyalty Program
A robust digital lending platform should provide critical analytics to help you make informed decisions.
For example, the platform should provide information about client acquisition channels, time applying for loans, or cross-device tracking.
These insights assist you in identifying and correcting issues in your onboarding process to attract more qualified borrowers to your financial institution.
The digital lending platform will help you get return customers. CompassWay’s digital lending platform displays personalized loan recommendations to existing borrowers to expand the possibilities of making them repeat customers.
Notifications, SMS, email, or personalized nudges will give your marketing teams the tools to create targeted campaigns and outreach that engage customers and members, resulting in long-term loyalty and stickiness.
The digital lending technology also makes precise loan applications for return customers by automatically pre-filling forms with existing client information. The result is improved customer experience and a higher retention rate.
What Is The Cost Of Client Financing?
The cost of incorporating consumer finance into your company strategy is determined by the financing solution you use.
It would help if you accounted for the costs of in-house financing, credit checks, and collection of consumer payments.
Labor will also be required to handle and fulfill administrative chores, increasing your expenditures.
You will be charged a fee to use third-party financing services. The cost might be a percentage of each transaction or a monthly fixed fee.
Should You Offer Customer Financing?
For retail businesses to thrive, there must be a way to bridge the divide between closing and losing a deal. Consumer lending is a reliable financing solution with many benefits for your retail business.
Whether you’re just starting as a retailer or want to take your existing business to the next level, offering in-house financing to customers is the best way to land repeat business, boost sales, and increase your overall ROI.
With Compassway’s in-house lending solution, which provides everything you need to offer in-house financing to all your clients, you can boost the overall ROI of your retail business with total confidence and significantly reduce potential costs while amplifying the benefits of this instrument.
CompassWay is a reliable commercial lending software that offers an all–in–one loan management system to start an in-house financing business. Try a 14-day free trial period.