Advantages & Disadvantages of Consumer Financing

Function

Consumer financing is a type of financing that is offered by credit providers to merchants. The companies that offer this type of financing are generally the same companies that offer credit cards to the general public. These companies allow customers to set up accounts through a merchant to buy goods or services from them. Companies work directly with these credit issuers to offer their customers an alternative means of payment for their products.

One of the benefits of offering consumer financing is that it often closes more sales. When a merchant has the option of offering financing to customers, this will have the effect of increasing closing percentages. Customers may not be willing to part with their cash quite as easily as they would be willing to finance a purchase. Most merchants find that when they offer customers financing, the customers begin to think about buying when they would otherwise not be willing to do so.

Another benefit of offering consumer financing is that it often leads to larger sales. When customers find out that financing is an option, they start to think about what they could buy in addition to what they originally planned on buying. Customers may only have a certain amount of cash that they can use, but they will gladly charge the rest of their purchase on consumer financing in many cases. This increases sales volume and leads to a bigger average sale.

One of the big drawbacks of offering consumer financing is that it can increase your costs. The companies that offer this type of financing are in it to make a profit. They will charge the business a percentage of each transaction that is processed on the consumer financing. This comes directly out of your profit on the sale. While the increase in business may be worth it, this can make the sales that you close less profitable.

To make consumer financing work for your business, you need to set up some rules associated with it. For example, if you have a sales force to sell your products, setting up minimum dollar amounts for sales can be beneficial. You may also want to institute a policy that only allows jobs that are sold above a certain profit margin to go on the financing. By setting up some rules in advance, you can avoid losing money on the consumer financing.