Consumer Financing 101

Businesses grow much faster when they offer their customers multiple payment options. Even if you’re a mom-and-pop shop, you can still offer different ways to pay for your goods or services depending on your business. Extending credit to customers oftentimes increases their purchasing propensity, so keep reading for a crash course in consumer financing.

What Is Financing?

If you allow your customers to pay by checks, credit cards or via invoicing, you’re already offering a form of financing. By accepting these methods of payment, you’re saying that you understand your customer will have the funds to pay for the goods or services once you execute the transaction, i.e., cash the check, run the card or mail the invoice. This good faith agreement tells your customers you trust them.

What Are the Risks?

If you accept credit cards, the credit card company assumes the risk, so this is a safe way to offer consumer financing to your clients. Accepting checks or invoicing places the risk on you, as the check might bounce or the customer might not pay his or her invoice. You must also consider that when you sell something on credit, you do not receive immediate cash flow, which is also risky to your business.

What About Policies?

If you decide that the additional sales potential is worth the risk, it’s time to establish clear-cut credit policies. You must determine which customers you will extend credit to, write clear payment guidelines, determine how to bill your customers, and create a collections plan for those who fail to make their payments as agreed upon. Ensure your customers and employees are well versed on these policies.

Your Policies

Your business will be held to some policies itself, so make sure you familiarize yourself with the Federal Trade Commission’s consumer credit and protection laws. The FTC outlines many things, including the duration you have to respond to billing errors and exactly how aggressive you can be if you must place someone in collections. Make sure you understand everything the FTC requires of you.

Congratulations! You’ve just graduated from consumer financing 101… well, not exactly, but you do have a better idea of how you can extend credit to your customers without taking on too much risk. If you are smart about how you extend credit and to whom you extend it, you should be able to increase your sales by giving your customers more time to pay. This is a win-win situation for you and them.