Is Your Small Business Ready to Offer Customer Financing?
Businesses should provide different payment options to customers to ensure maximum conversion. If you are dealing with expensive items, there is a very good chance the price tag is causing people to leave their cart. Moreover, the present situation may have forced them to use their lines of credits already.
Nonetheless, you can help the customers complete the transaction by offering them some finance options. This will reduce the number of abandoned carts because of the high price. However, it is a big step that comes with significant investment and risk.
Here, we have mentioned the pros and cons of customer financing for small business to help you decide whether the business is ready or not for it.
Cons of Customer Financing
As mentioned above, there are some risks involved in customer financing. The problem is generally caused when the business is not ready to provide a financing option to the customers. Go through the cons discussed below to analyse the risk associated with customer financing.
- Increased Customer Acquisition Cost
The objective of offering customer financing is to increase the conversion rate. You are willing to spend more to make customers buy the items from their cart. This is not a one-time investment as the system will require maintenance, updates, and bug fixes over time.
Therefore, the customer acquisition cost will increase based on the people availing of the finance options. It may seem unreasonable to keep the finance options if the number is too low. You may find better use of the money to get more customer at the same cost.
- Possible Bad Debts
It is not easy to get money back from the borrowers if they are going through tough financial trouble. They will make some defaults on the payments and expect some bad debts with no scope of repayment. You might have to hire a separate team for collection and legal purposes.
You will lose some money in these situations for the fees of lawyers and collectors. Many organisations sell their debts to a third party that takes care of the collection. Though, they will cut some percentage of the debt for the efforts.
- Initial Investment
Prepare yourself for some heavy initial investment if you want to provide the service with the help of an in-house team. You can provide the financing option through credit cards or some private lenders on the online and offline store. However, a support team is always required to explain the process and clear the doubts.
The investment will include a payment getaway with the financing option and trained staff to convince the buyers. You can always outsource the whole process to some service provider at a relatively lower cost. You can also contact money lenders to provide financial support.
- Transactions Below the Threshold
You will make returns from the investment only if a certain number of users sign up for the service. This threshold will ensure the customer acquisition cost remains reasonable enough for the stakeholders. Moreover, some service providers for the transaction may charge some fees if the transaction is below a certain number of transactions.
The major benefit of providing the finance option is the increase in sales and revenue. You will find it easier to get customers with the same marketing efforts. We have explained the pros below for a detailed understanding.
- Increased Conversion Rate
The traffic on your website or the foot count in the store may seem good enough for the investment. But the customers are leaving because they cannot afford the upfront payment for certain items. Customer financing will help in the last stage of the customer journey to convert them.
- More Sales
The increase in conversation rate will increase the sales number as well. But the benefit is not limited to acquire new customers. The existing customers will also return and make some purchase with the finance option.
You are increasing the customer lifetime value by introducing the finance option. People will also add more items to their carts because of the increased affordability.
- Upfront Payments
The business does not need to provide finance for its products. There can be a service provider, credit card agency or some private lender making the payments on behalf of the customers. Therefore, you will receive the payment upfront, and the defaults are not your problem anymore.
- Better Price for the Customers
A heavy payment upfront can create serious stress on a budget of customers. Financing will make it easy to procure the items with easy repayment. However, the interest will increase the overall cost based on the selected tenure.
In the end, your targeted audience and the traffic may help you find the answer to the question in the title. Your audience will use the financing option. Therefore, take some customer feedback to find whether financing is the solution your customers are looking for.