Ecommerce Financing: Is It Right For Your Business?
Ecommerce financing has become a popular way for businesses to give customers more buying power. It’s essentially a type of consumer credit that allows customers to buy their favorite items from retailers now and pay the purchase price back over time.
Big-name stores do this all the time, but it’s less common among smaller businesses and they miss out on increased sales as a result. The average order size of a small business offering in-house financing can increase by as much as 120 percent.
It’s essentially a type of consumer credit that allows customers to buy their favorite items from retailers now and pay the purchase price back over time.
Ecommerce or customer financing is not all just reward and no risk. It will require your business to pay for a financing program (or pay more fees), lend funds and take on the additional risk of allowing the borrower time to repay the money they borrowed for the purchase.
If you’re interested in offering customer financing in your business, here are some tips to help you decide whether to add this solution to your business budget.
Assess the Current Market For Your Business
Before you consider ecommerce financing for your small business, run the numbers. Look at data to track sales over the past few months along which your most popular products or services.
To get clearer answers for some of your questions, conduct surveys and ask your customers to get their thoughts.
What was your average sale price? Would your customer be interested in credit options? Do you have any products that cost enough to justify any expenses that come with e-commerce finances? To get clearer answers for some of your questions, conduct surveys and ask your customers to get their thoughts.
Choose Between No Charge, Flat Rate or Discount Rate Financing Programs
There are several different financing programs to choose from. Some are available at no additional charge to you while others charge a flat or discounted rate per transaction. PayPal and Blispay offer a free ecommerce financing service, but you still have to pay transaction fees like usual.
The consumer credit option you choose all depends on which types of items you’re selling, how much you’re selling them for, and how often you expect customers to opt for in-house financing.
Other financing companies may charge you a fee of 1-5% of the purchase price. This amount is deducted from what you’d make on the sale so the more expensive the item, the bigger your fee. Flat rate options cover an unlimited number of transactions but you can expect to pay $40 to $50 per month on average. The consumer credit option you choose all depends on which types of items you’re selling, how much you’re selling them for, and how often you expect customers to opt for in-house financing.
Consider How You’ll Manage Customer Finance Accounts
Hiring a financing company to handle your ecommerce financing can be more costly. However, they’d be in charge of approving customer’s application and collecting their payments and interest each month. If you choose to finance in-house programs — like Blispay, FinanceIt or LendPro — will connect to your small business website and allow customers to apply for financing online or in your store.
Still, you may need to hire more help in the accounts receivable area of your business depending on how many customers are financing purchases. It’s important to have someone tracking their payments and following up, so factor in whether your increases sales projections will justify your hiring someone else to help with accounts receivable.
Factor in the Benefits
Before we get to the risks associated with ecommerce financing, consider the benefits along with why you want to adopt this strategy for your business. Financing allows shoppers to obtain the products they need and love while making timely monthly payments that fit within their budget.
PayPal found that over half of their users wouldn’t have considered making a purchase if they weren't offered a flexible payment option.
It’s also useful for you as a business owner because you get the opportunity to make more sales. According to a Klarna survey, 75 percent of shoppers prefer online merchants that offer instant financing and 28 percent preferred to switch to merchants who provide this option. PayPal found that over half of their users wouldn’t have considered making a purchase if they weren't offered a flexible payment option. The numbers reveal that offering consumer credit can help boost sales for your business and even help you get new customers as well.
Factor in Risk
While ecommerce financing can increase sales in your business, you also need to accept the risk that some customers may not pay back what they borrowed. Even if someone seems creditworthy on paper, you never know how responsible they are with their finances. Since you may collect the total purchase price upfront, it’s wise to boost your business savings in case you are ever left on the hook for the loan amount in the future.
Even if someone seems creditworthy on paper, you never know how responsible they are with their finances.
Establish a Backup Plan For Cash Flow
Once you first get started with in house financing, your cash flow may take a hit as you wait for customers to get approved and start making payments — that is if you’re not working with a company that will pay you to total purchase price upfront.
A credit card is a flexible tool you can use to cover monthly expenses as you wait for financing payments to come through for your products.
To help bridge the gap and build your business credit score, you can use a quality business credit card. Having a business credit card allows you to use a revolving line of credit to cover expenses for your business as they come up.
A credit card is a flexible tool you can use to cover monthly expenses as you wait for financing payments to come through for your products. Simply pay the bill on-time each month to build your business credit, or you can even pay the bill off in full to avoid any interest charges. Another perk of using credit cards is that you can earn rewards including cash back, extended warranty and purchase protection.
Ecommerce financing can be great for your business allowing you the chance to give your customers more buying power and increase sales overall. However, you need to carefully weigh the risks along with the potential reward. Determine if your customers are interested in consumer credit and map out how much it might cost your business. Choose the financing program that works best for your needs and make sure to have a backup plan to keep cash flow stable.
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