Have you ever wondered if there’s a missing piece in your business strategy to drive sales and attract customers?
What if there was already a solution to accomplish this, which could also seamlessly integrate into your workflows? There is – third-party consumer financing. It’s a simple concept that’s making significant changes in the ways businesses boost sales, acquire new customers, and increase revenue.
With third-party financing or lending, an external financier offers payment options to your customers, enabling them to purchase now and pay later. This setup means you get paid immediately while your customers enjoy flexible payment terms. It’s a win-win: your sales increase and your customers leave with their desired goods or services.
Curious about how third-party financing works? In the following sections, we’ll dive into the nuts and bolts, exploring various financing options, the benefits, and how to implement this solution in your own business.
What is Third-Party Financing?
Third-party financing is a financial arrangement where an external entity, typically a financial institution or a specialized financing company, provides funds for a transaction between a business and its customer.
Financing software is provided by the institution and seamlessly integrates into the business’s existing website workflow and systems. This integration means that customers can apply for financing directly on the service provider’s website without the need to navigate away to external sites. This streamlined process enhances the customer experience by offering a quick and efficient application process, maintaining the continuity of their shopping or service experience.
Third-party financing removes barriers to immediate purchases, as customers who may not have the total funds upfront can still complete transactions. The business benefits from the following:
The immediacy of the transaction
Receiving full payment upfront from the financier
Securing revenue without the risk of payment defaults.
This ease of access to financing directly on the service provider’s website simplifies the purchase process and encourages customer engagement and loyalty, leading to potential growth in sales and an expanded client base. Such an arrangement is particularly effective in enhancing customer trust and satisfaction, as it provides a convenient and accessible financing option right at the point of decision, making it an invaluable tool for business growth and customer retention.
How Does Third-Party Financing Work?
The heart of third-party lending lies in its software, which integrates seamlessly with a business’s existing online platforms, such as its website. This integration ensures a smooth customer experience, as it allows for financing options to be presented directly alongside products or services.
Here’s a breakdown of the workflow:
Application Process: When a customer chooses to finance a purchase, they can easily access the financing application via the business’s website. This process is typically embedded within the checkout or payment page, ensuring that the customer doesn’t need to navigate away from the site. The application form is straightforward, requesting personal and financial information.
Credit Assessment: Upon submission, the software instantly processes the application to assess the customer’s creditworthiness. This assessment is done in real-time, ensuring quick on-screen results.
Approval and Financing: If the application is approved, the software facilitates the immediate release of funds from the financier to the business. This means that the business receives full payment for the product or service upfront, despite the customer opting to pay over time.
Repayment: For the customer, repayment terms are clearly outlined, typically involving fixed monthly payments over a specified period. The financial institution will present a repayment agreement to the customer outlining the loan amount, interest rate, term, and other conditions. The customer will repay the lender directly.
Types of Third-Party Financing for Customers
Third-party financing is full of payment models and options that adapt to the unique needs of diverse customers. Let’s take a closer look at some of the most popular types of third-party lending options for customers:
Installment Loans: These loans allow customers to finance their purchase by borrowing a specific amount and repaying it in fixed, scheduled payments. This option can attract a broader customer base, including those who prefer or need to spread the cost of a purchase over time. It’s ideal for higher-priced items, encouraging sales that might otherwise be lost due to upfront cost concerns.
Line of Credit: Similar to a credit card, this financing option offers a credit limit that customers can use, repay, and reuse. It encourages repeat business and customer loyalty by providing a flexible spending option. This is particularly effective for frequent, smaller purchases, as it simplifies ongoing transactions for customers.
Deferred Payments: This payment plan allows customers to start their repayments after a set period, often without interest for the deferment duration. In other words, the customer can purchase the goods or services immediately but begin the repayment after several months. This option can boost immediate sales, appealing to customers who expect to have the funds shortly but can’t pay upfront. It’s especially useful for seasonal businesses or those offering time-sensitive products or services.
Buy Now, Pay Later (BNPL): This option allows customers to make a purchase and pay over a short term, typically without interest. BNPL can attract customers who are unable to pay the entire cost upfront, enhancing the appeal of more expensive items with favorable interest rates.
Lease-to-Own: This option allows customers to lease a product with the option to purchase it at the end of the financing term. This can be structured with low initial payments that contribute towards the purchase price. It’s particularly effective for businesses selling high-value items, as it lowers the barrier to entry for customers. By offering a path to ownership, it can also build customer loyalty and lead to repeat business.
Point-of-sale (POS): POS allows customers to apply for financing at the moment of purchase, whether in-store or online. It streamlines the buying process by offering quick credit decisions and flexible repayment plans. Especially effective for spontaneous purchases or unexpected expenses, point-of-sale financing integrates seamlessly into the shopping experience. It’s ideal for businesses aiming to facilitate easier purchase decisions and enhance customer satisfaction, often leading to increased sales and stronger customer relationships.
The Benefits of Offering Third-Party Financing and Lending
Shifting our focus to the benefits that third-party financing brings to businesses, it’s clear that this model is more than just a payment facilitator – it’s a strategic tool that can drive significant growth and customer satisfaction.
Here are the key benefits that businesses can reap from incorporating third-party financing options:
Increased Sales and Revenue: Businesses often see a boost in sales as financing options make higher-priced items more accessible to a broader range of customers. This accessibility can lead to an increase in average transaction value, thereby driving up overall revenue.
Improved Cash Flow: With third-party financing, businesses receive full payment upfront, even though the customer pays over time. This immediate cash inflow can significantly improve cash flow, promoting operational stability and growth.
Expanded Customer Base:Offering financing options attracts a wider demographic, including those who may not have the full payment upfront but can manage installment payments. This expansion of the customer base can open new market segments and opportunities for client acquisition.
Enhanced Customer Satisfaction and Retention: Providing flexible payment options can improve customer satisfaction and loyalty. Customers are more likely to return to a business accommodating their financial needs, leading to repeat business and long-term customer relationships.
Competitive Advantage: In markets where competitors don’t offer financing options, businesses that do can differentiate themselves. This advantage can be a deciding factor for customers comparing similar products or services.
Reduced Risk: The financing institution will be responsible for determining customer eligibility, conducting credit assessments, and collecting payments. Since the financing institution handles the credit risk, businesses are protected from the potential of non-payment.
Access to Data: Third-party lending companies often provide businesses with valuable customer data and insights about usage and average financing amounts. This information can be used to tailor marketing strategies, improve product offerings, and enhance overall business strategies.
Marketing Opportunities: Financing options can be used as a marketing tool to attract customers, especially during promotions and sales. Highlighting financing options in marketing campaigns can increase customer engagement and drive traffic.
What Types of Businesses Benefit from Third-Party Financing?
Businesses in all industries can benefit from integrating a third-party financing option. In addition to the benefits third-party financing provides it can also address many common pain points for small-to-medium businesses looking to expand.
Here are the types of businesses that can leverage this financing model to their advantage:
Businesses with Cash Flow Challenges: Third-party financing ensures immediate payment upon sales, alleviating cash flow inconsistencies and providing more financial stability for businesses experiencing cash flow fluctuations. Medical clinics, including vision, hearing, and chiropractic services, where procedures are necessary but can be costly, can greatly benefit from third-party financing to alleviate cash flow inconsistencies.
Businesses Seeking to Increase Average Transaction Value: If increasing the average sale per customer is a goal, third-party financing can be a catalyst. Offering financing options encourages customers to opt for higher-priced items or additional services, boosting the overall value of each transaction. This payment option can be especially beneficial for home improvement businesses, particularly for roofing, pools, spas, and flooring projects.
Businesses Looking to Expand Customer Base: For those aiming to attract a wider audience, including customers who may not have the necessary funds upfront, third-party financing is an excellent tool. It opens up the business to a broader demographic. For instance, dental and plastic surgery practices can use third-party lending to attract a wider audience, including customers who may not have the necessary funds upfront.
Businesses with High Customer Acquisition Costs: Third-party financing can be a strategic move for businesses where acquiring new customers is typically expensive. For industries like tax resolution and auto repair services, where acquiring new customers is typically expensive, third-party financing can attract new customers more effectively, offsetting traditional marketing and acquisition costs.
Businesses Aiming to Enhance Customer Loyalty: Customers who find the payment process convenient and flexible are more likely to return for future purchases. For example, veterinarians can use third-party financing as a tool to encourage repeat business and customer loyalty, particularly for ongoing care and treatments.
Businesses with Long Sales Cycles: Financing can shorten the sales cycle, particularly in businesses where the time from initial customer interest to final purchase is typically long due to cost considerations. Kitchen remodeling and plumbing businesses can use financing to expedite decision-making for these larger, cost-intensive projects.
Businesses Selling Big-Ticket Items: Companies dealing in high-cost products or services, like in the solar and HVAC industries, can see a significant benefit, as financing makes these purchases more attainable for the average customer.
How To Offer Third-Party Financing to Your Customers
The “why” of third-party financing is clear – among the top benefits, it helps businesses boost their competitive advantage, clientele, and income. It’s an easy decision for businesses looking to expand and grow their operations.
But is integrating this financing model into your existing software and workflows also that easy? You’d be surprised that it often is. Here’s a more detailed guide to help you understand the logistics of offering third-party financing to your customers:
Research SaaS Providers: Use online business directories, industry forums, and software review platforms like G2 or Capterra to find and compare SaaS providers. Look for providers with a solid track record, evidenced by customer testimonials, case studies, and industry recognition or awards.
Evaluate Financing Options and Lender Networks: Confirm that your chosen SaaS provider has a reputable network of lenders. A robust network means a variety of financing options for your customers, such as installment loans, BNPL, and revolving credit. Explore the range of financing solutions to ensure they meet the diverse credit needs of your customer base, accommodating everyone from those with strong credit histories to those with less conventional credit backgrounds. Finally, look into the specific terms provided by these lenders, including interest rates and repayment options, to make sure they are attractive and affordable for your customers.
Understand Compliance and Security: Inquire about the SaaS provider’s compliance with financial regulations like the Truth in Lending Act (TILA) and the Payment Card Industry Data Security Standard (PCI DSS) standards. Also, assess their adherence to privacy laws such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA), depending on your location and customer base.
Integrate and Test: Integration typically involves technical teams from both sides. Your IT team should work closely with the SaaS provider to embed the financing platform into your existing systems. After, conduct thorough testing in a controlled environment to ensure the platform functions seamlessly with your website or POS system. This includes testing the application process, approval times, and the user interface.
Market and Educate: Develop marketing campaigns that highlight the availability and benefits of financing options. Use email marketing, social media, and in-store promotions to spread the word. Also, create educational content such as blog posts or how-to guides that explain how customers can use these financing options and their benefits.
Gather Feedback and Adjust Strategies: Use customer surveys, feedback forms, and sales data to assess the impact of financing options on customer behavior and sales. Review this data to understand customer preferences and adjust your financing offerings accordingly.
Integrating third-party financing into your business is not just a step towards financial flexibility; it’s a leap towards unlocking new growth potentials. By embracing this model, you’re not only offering your customers a more accessible way to purchase but also strategically positioning your business for expansion and success.
Ready to take this step? Begin by researching potential SaaS providers, evaluating their third-party lender networks, and preparing your team for a smooth integration. Take the first step today and propel your business into a future of financial versatility and customer satisfaction.
Content ManagerAnais is the content manager at Finturf and is based in Los Angeles, CA. She has a background in finance writing and legal studies, with a curiosity for how tech solutions are revolutionizing business offerings and growth. She works hands-on with innovators in the point-of-sale and finance industries to create content that engages and informs her readers.