Consumer Financing as the Ultimate Competitive Advantage for SMEs in 2021

Customer financing, consumer credit, and in-house financing are different names used to describe the same concept – providing your clients with a way to pay for your goods or services in several installments with interest that makes it worthwhile for you. And while this marketing/monetization opportunity is starting to go viral among business owners, you still have a chance to be among the early adopters.

You may be selling cars, furniture, plastic surgeries, dental services or phones – anything that a person might want to pay for overtime rather than in a one-time transfer. The process stays the same. We cover the intro to in-house financing here. But in a nutshell, you give the potential buyers, who are undecided, an argument that is likely to tilt them in favor of choosing you on the spot even if they can’t afford to pay for the purchase upfront.

As of now, modern in-house financing is a competitive advantage in most markets. Several decades ago the concept of point-of-sale crediting was popular among local retailers, but due to the lack of decent ways of borrower evaluation, the risk of building bad credit grew. In recent years, things have changed thanks to the record-breaking development of the FinTech industry and significant lowering of the alternative lending niche’s entry barriers.

Five or so years ago it became feasible for smaller lenders to compete with traditional banks and outperform them in terms of safety and speed of loan approvals. The ever-growing extent of automation in lending streamlined business processes, minimized human involvement and error, as well as allowed to offer humane interest rates. But FinTech companies, specifically lending automation pioneers like TurnKey Lender didn’t stop there and made it possible to easily deploy, brand, and maintain a wholesome lending automation platform for in-house financing programs.

So does the market have any proofs that customer financing is worth the effort? Yes, here are some stats:

• According to FitSmallBusiness, when an SME adds an in-house financing option, the average order size may increase by up to 120%. That influx of money may, of course, be spread over time, but the growth can be life-changing for a business.
• 93% of the customers who used in-house financing are going to use consumer credit again.
• Incremental sales are estimated to increase by 17% thanks to consumer financing.
• As of the end of 2018, lack of consumer finance options is costing UK businesses £25bn and there are no reasons to think that this is different for other markets.

Why in-house financing is gaining traction

When given a choice to deal with a bank as a middleman or to get a loan directly from the business owner, customers logically are compelled by faster approvals and easier application process of in-house financing. In the past, this would go hand-in-hand with high risks for the lender. Now, thanks to advanced borrower evaluation algorithms, business can manage to reduce risks to a minimum and safely approve only the borrowers who are likely to pay back their loans.

So, compared to a business that doesn’t offer consumer financing, what benefits do you get if you do?

Better user experience – First and foremost, quickly getting a loan at the point of sale is convenient. These days, getting an installment plan for a phone or a car isn’t something shameful. Credit became a part of our lives and is viewed as just another financial instrument. So for a buyer, even if they aren’t going to use it right away, it’s a piece of information that may stick with them and when they need your financing program, they’ll come to you, not your competitor. And even if your conditions are slightly worse than those of a neighboring bank, chances are that the convenience of sealing the deal on the spot will prevail.

Easy to apply – Given that you use a modern lending automation platform to power your in-house financing program, application process and borrower evaluation can take minutes while keeping you, the lender, protected.

Flexibility – Even though launching customer financing program requires some additional efforts, it not only has the potential to significantly grow your business and add a sizable revenue stream for your operation, but you also become more attractive in the eyes of the customer since you present them with a choice. In addition, your own program will be more flexible in terms of filtering process than that of a bank. And since you’ll be using an advanced scoring model like TurnKey Lender’s, you’ll be able to approve more people who wouldn’t have been eligible with traditional financial institutions.

Builds credit – Customer financing loans are usually rather small and paid off quickly, so if you’re reporting to a credit bureau (and some jurisdictions require that), your borrowers can rather easily and quickly improve their credit score.

Drive repeat business – Once a client has signed up for an installment plan, you’re expected to stay in touch with them. And it’s in your best interest to build real human relations with them by means of truly helpful reminders, tips, sales warnings, possibly even a discount on their interest. This way, next time they will think about you and your services or products by default. Because often we prefer to deal with the people we know even when the practical thing is to look for someone new.

Increases average order value – Since buying decisions are made much easier through credit products, the users are more likely to buy something they wouldn’t have if they had to pay upfront. For each business, the preferable payment model will differ. If you’re not that dependent on the cash flow generated by full payments upfront, pushing customer financing might be a good idea since it lets you make more money through interest and keeps you on the radar of the buyer longer, letting you upsell and promote the products or services they may need in the future.

Compete with large chains – In the age of total globalization, it keeps getting harder to compete with the big guys that often can offer products at almost wholesale price thanks to the volumes they sell. In-house financing enhanced with a personal touch may be the winning advantage that will get the clients to make a choice in your favor.

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Risks of customer financing

Changes in cash flow – Of course, not all of your customers will opt in for a loan to get your product or service. But many will and this can change the cash flow of your business. At the same time, you still need to fill up the inventory and pay salaries and utilities. And like any important change in the business model, you will need to adjust. So make sure to consider the potential for this change in your cash flow before launching in-house financing for your operations. Keep in mind that any business needs time for adjustment after implementing customer financing, but if done right it can be generously covered by the growth in the number of customers

Risk of bad debts – Even the most advanced loan origination and borrower evaluation software can’t provide a 100% guarantee that every single loan will be paid back on time and in full. The thing is that even with the most thorough of checks, you can’t predict everything that may happen to a borrower. So there’s always a risk of bad debts appearing and piling up.

The way to combat these risks is to:

1. Use a lending automation platform sophisticated enough to weed out as many wrongdoers as possible.
2. Negotiate a deal with a local collection agency that would help you get the money if need be.
3. Attract enough new customers to outweigh any bad debts that may appear.

In all honesty, anyone who sells credit products has to acknowledge the risks of some of their borrowers becoming delinquent. That’s just the part of the business. But if it wasn’t worth it, the lending industry wouldn’t grow this fast.

Point-of-sale financing vs your own customer financing operation

There are two major ways you can go when it comes to offering customer financing. You can either get a deal with a point-of-sale credit platform that will finance the loans and usually will pay you money upfront. But at the same time, they will get to keep the interest and possibly even charge the merchant for processing payments. This is kind of like what a bank would do. But if you don’t have any resources to put together a new revenue stream for your business, this may work as a marketing tool to convert more customers.

A different approach would be to get an all-in-one platform like TurnKey Lender. It’s deployed by our specialists on your side and you stay fully in control of what’s going on. One may think that taking care of credit checks and underwriting sounds daunting. But when you have the most intelligent software on the market doing all the heavy lifting for you, it’s really not that hard. You can see that for yourself with our free trial.

Of course, you’ll need to do some initial research in terms of local regulations and legal obligations for businesses that issue loans. But as a result, you get to keep the control and the profits. It’s the same as having your own website vs having a social media account. With TurnKey Lender you are in control and you are the end beneficiary.

Next steps

Consumer financing is on the rise and as offering credit products becomes both easier and safer, this tidal wave of a trend will keep on growing, powered by intelligent LaaS solutions like TurnKey Lender. That said, the choice of the platform that will power your in-house financing is crucial as it’ll dictate how safe and fast you’ll be able to process loan applications, how efficiently you’ll be able to take care of reporting and servicing, after all, how expensive it’ll be to maintain your platform.

Choose the lending automation platform that:

• Has an advanced customizable scorecard that will ensure that your risks of issuing a loan are reduced to a minimum
• Covers all the functionality within one solution
• Has scalability to process as many applications as you may need, because in the digital age that’s what matters. Dealing with growth doesn’t look like a problem until you have to actually do it
• Doesn’t rely fully on human analysis and processing
• Is white-label and can be styled according to your needs
• Offers 24/7 support to its customers
• Is trusted and has reviews on popular SaaS listings

There’s no arguing that consumer financing can be an important asset for SMEs. And as a part of TurnKey Lender’s mission of making fair lending globally a reality, we know how to provide business with everything you need to start offering point-of-sale credit on your own terms. Our all-in-one system can be deployed and completely branded according to your needs within days.

With TurnKey Lender’s platform the entire application processing, borrower evaluation, and loan issuing can be as fast as 9 minutes (that includes a check with a credit bureau). And to ensure safety for the business owner, each loan application is analyzed by a combination of traditional and alternative proprietary algorithms and data sources. The origination engine is powered by self-learning deep neural networks to approve more of the safe applications faster. We know what the business needs in a consumer financing platform and we deliver.

Feel free to reach out for a free trial and our team will be happy to show you how we can help.