If you want to make financing offers to your customers, 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.
If your company will be selling goods or services on credit, offering hire purchase, hiring out goods for more than 3 months or lending money to customers in any other way, you will almost certainly be legally obliged to register with the Financial Conduct Authority (FCA). This rule applies even if you’re simply introducing your customers to a third party financing company.
There are only a few exceptions to this rule.
You don’t need FCA authorization just to accept credit cards (unless you issue the credit cards yourself), or if you let customers pay for goods in 4 or fewer instalments, without interest, within 1 year of sale.
You also don’t need FCA approval if you operate a business-to-business service and you offer financing services only to other incorporated businesses (not sole traders or small partnerships).
In all other circumstances, if you offer customer financing without FCA approval you could be fined or even imprisoned.
The criteria for FCA approval are quite general – they'll essentially be checking for any information to suggest that you'd treat customers honestly and fairly, in line with the law. For example, if you previously offered credit without authorization or breached consumer protection legislation, this could count against you. The FCA will also have the right to revoke your licence at any time.
Once you’re authorized, you'll need to consider the terms of the offers that you'll make to your customers. There’s no specific limit on the interest rate or other charges you can impose, but if a court decides that you've treated customers unfairly or misled them, you may have to pay back the full value of the loan and risk losing your FCA authorization. It’s therefore essential to ensure that any posters or marketing is clear, and that information given out by your staff isn’t misleading.
Dealing with data
There’s certain information that you must provide each customer with as part of their financing terms, including: the annual percentage rate (APR) you will charge, the total amount financed, details of how much they need to repay and when, and details of any other charges that the customer may incur, such as charges for missed or late repayments.
As long as you’re only offering credit on purchases, and not cash loans, there’s no legal obligation for you to conduct credit checks. However, if you wish to check customers’ credit worthiness, you'll need to factor in the costs of obtaining information from a credit reference agency.
You must tell the customer if you’re going to pass on their debt or details to any third parties, and unless they sign the agreement on your premises you must allow them a cooling off period in which to cancel.
A third party finance provider can advise you on communicating with customers and staying within the law. Otherwise, if you’re going to provide the credit yourself, you’re strongly advised to seek expert legal assistance before you begin.