Offering Finance to Customers

Offering finance to customers can be a great way to boost sales and make your products or services more affordable. Whether you run a shop or provide services, customer financing for small businesses can help you attract more customers.

If you want to provide your customers with finance packages, you can choose either to administer the loans yourself or to contract a third-party financing firm to run them on your behalf. Before you start, however, it’s important to understand that consumer credit is a highly regulated practice.

Here’s everything you need to know about offering finance to customers and how it works.

What is customer finance?

Customer finance is when a business allows customers to pay for products or services over time instead of all at once. This could be through payment plans, store cards, or loans. It makes it easier for customers to buy from you because they don’t need to pay the full amount upfront.

Legal implications

If you decide to offer finance to your customers, you might need to follow some legal rules. In the UK, if your business offers goods or services on credit, payment plans, or hire purchases, you may need to get approval from the Financial Conduct Authority (FCA). The FCA makes sure businesses treat customers fairly when they offer customer financing. This rule may also apply even if you’re simply introducing your customers to a third-party financing company.

There is one exception to this rule: you don’t need FCA approval if you operate a business-to-business service and you only offer financing services to other incorporated businesses (not sole traders or small partnerships).

It's a good idea to check with the FCA before you can offer financing to your customers.

FCA criteria

The rules for getting FCA approval are pretty straightforward. They want to make sure you treat your customers honestly and fairly, following the law. If you've offered credit without permission before or broken consumer protection laws, it might hurt your chances of getting approved. The FCA can also take away your license at any time.

Once you’re approved, you need to think about the terms of the customer financing you’ll offer. There's no strict limit on the interest rate or other fees you can charge, but if a court finds out you treated customers unfairly or gave them misleading information, you could be forced to repay the entire loan and might lose your FCA approval.

That's why it's really important to make sure all your financing terms are clear and that your staff gives accurate information to customers.

What types of finance can you offer?

There are different ways you can offer finance to your customers:

• Revolving credit includes store cards with a credit limit that customers can use repeatedly.
• Point of Sale (POS) finance is when customers pay for products over time. You can offer interest-free credit, “buy now pay later” deals, or credit with interest.

Many companies that offer POS finance will handle most of the work for you, including training your staff and managing the process. Sometimes, they’ll even offer bonuses for new finance for customers' deals.

How does customer financing work?

When you offer customer financing, you let your customers pay over time, usually with interest. Here’s how it works:

1. Decide if you want to offer financing to customers through your own business or by using a third-party financing company.
2. Choose whether you’ll offer interest-free options or charge interest on the financing.
3. If you need FCA approval, get it before you start offering finance.
4. Let your customers know they can buy now and pay later or use a payment plan.

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Dealing with data

No matter what type of finance you offer, you must give certain information to each customer as part of their financing terms. This includes:

• The annual percentage rate (APR) you will charge
• The total amount financed
• Details of how much they need to repay and when
• Details of any other charges the customer may have to pay, like for missed or late payments

If you’re only offering credit on purchases (not cash loans), you don’t legally have to do credit checks. However, it’s usually a good idea to check if a customer is likely to pay back the credit. To do this, you’ll need to consider the cost of getting information from a credit reference agency.

You must tell the customer if you’re going to share their debt or details with any third parties. Also, if they don’t sign the agreement on your premises, you must give them a cooling-off period, which allows them to cancel.

A third-party finance provider can help you communicate with customers and make sure you’re following the law. If you plan to handle the credit yourself, it’s a good idea to get expert legal advice before you start.

If you're looking for finance for your own business, take a look at our flexible business loans or call one of our relationship managers on 020 7100 0110.

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Article Topics

• Customers
• Finance & Funding
• Legal
• Sales