Customer financing is a great way to increase sales. In fact, some industries expect to pay on credit, making financing a requirement. Whether you're a B2C or B2B, a large company or small business owner, sell goods or services, offering customer financing can be powerful growth accelerator. In this article, we'll look at what goes into a customer financing program for B2C and B2B businesses.
B2B Customer Financing
B2B customers expect to pay on credit. This doesn't mean merchants should automatically extend credit to new customers. Every company offering credit needs a well-defined credit policy to help reduce payment risks. New customers should go through an application process, just like consumers do when applying for a credit card. Length of time in business, amount of revenues, and existing references all come into play when evaluating a business' creditworthiness.
Not everyone needs to start off with 90-day net terms. Your newest customers can start with 45-day net terms. As they continue to pay on time, terms gradually increase until they reach the credit policy's maximum terms. In this case, 90 days.
Determining the net terms is a function of a company's accounts receivable process. Meaning, what are supplier net terms, and what does DSO look like? Companies get into trouble when their DSO extends past supplier net terms. For example, if the average supplier terms are 30 days but the company's DSO is 60 days, the company will need to somehow finance the 30-day gap in order to pay suppliers on time. For companies that don't watch this gap and allow it to expand too much, the result is a cash crunch.
A DSO of 60 with supplier terms of 60 - 70 days can often work well. Some companies are lucky enough to have a DSO of 45 days and supplier terms of 60. In that case, the company always has more than enough cash to pay suppliers.
Payment collections are a big part of running an in-house credit program. Chasing down customers who pay late or haven't paid at all is time-consuming work. The good news is that collections can be outsourced to a financing company. A company called a factor advances a percentage of the value of overdue invoices. Once they collect on the invoices, you'll receive the remaining amount minus the factor's fee. This technique is called invoice factoring. While it can be expensive, it can also save you lots of time in running down overdue payments.
B2C Customer Financing
Rather than paying through invoices, like B2B customers, consumers pay using credit cards. Using credit cards as a payment option greatly reduces risks for companies. Accepting credit cards also means the company doesn't need to run a credit program. Customers handle their own application process. Unlike B2B, it isn't something the company accepting credit cards needs to be involved in.
Accepting credit cards is virtually a must-have for online retailers. It is the defacto online payment method. B2Cs do have other effective financing options, which come in the form of merchants that allow customers to apply for financing at any time while shopping on a company's website.
Here's how it works: CompanyA accepts credit cards as a form of consumer payment. CompanyA wants to offer additional financing options, including payment plans but doesn't want all of the backend administration that comes with such financing. CompanyA contacts a payment solutions provider also called a point-of-sale credit payment solutions provider. Unlike a credit card merchant, a payment solutions provider allows customers to pay through a payment plan, interest-free.
Payment solutions provider plans handle customer application approval, payment settlement, and assume all risk and fraud that might be associated with a customer's payment. Once the payment is approved, the customer pays off their purchase over a pre-defined term. This might be four payments over two months or three payments over six weeks. The first payment is usually due at the time of purchase.
Customers must go through an application approval process but this is also different from that of credit card applications. Many payment plan products are not considered credit products per U.S. Regulation Z. Consumers don't have to worry about a hit to their credit since the application process performs only a "soft check."
How do these payment processors make money? If a customer pays late, they'll incur a fee. Businesses are also charged a transaction fee for each purchase. It is usually in the form of a percentage of the purchase value plus a small flat fee. An example might be 2.9% + $0.30.
Whether you are a B2B or B2C, there are many ways to structure in-house financing. If you don't want to deal with running a credit program, there are plenty of outsourcing options as well. No matter which way you go, offering customer financing can have a positive impact on growth through increases in checkout size and new customers.
- Getting your credit extended can be challenging when you first start making purchases with a company
- When looking at B2B financing, the average net terms are 45 days which can increase the longer you do business with a company
- B2C customers mostly pay through credit cards than handling invoices
- Whether you are B2B or B2C, there are a lot of different structures and methods to financing both areas