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.
If your company sells goods or services on credit, offers finance options or hire purchase, hires out goods for more than 3 months, or lends 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 couple of exceptions to this rule:
1. You don’t need FCA authorisation just to accept credit cards (unless you issue the credit cards yourself), or if you let customers spread the cost by paying for goods in four or fewer instalments, without interest, within one year of sale.
2. You also 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).
In all other circumstances, you need to have FCA approval before you can offer financing to your customers.
The criteria for FCA approval is quite general – they'll essentially be looking for confirmation that you'll treat customers honestly and fairly, in line with the law. For example, if you previously offered credit without authorisation 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 all the terms and conditions of your finance solution are clear, and that information given out by your staff isn’t misleading.
What types of finance can you offer?
The payment plans which a business offers to their customers can vary significantly, but most forms of finance will either fall under revolving credit (store cards with a credit limit) or point of sale finance (POS). Many companies that offer POS finance will allow you to take a hands-off approach; after providing you with full training they will manage the entire process and may even offer you incentives for new finance agreements.
If you do opt for POS finance, you can choose between offering interest free credit, ‘buy now pay later’ deals, or charged-for credit. Interest free credit options may be more attractive to small businesses who want to keep their overall offer competitive. On the other hand, charged-for credit would allow businesses to reap a higher financial reward due to wider interest margins and the opportunity for commissions.
Dealing with data
No matter which type of finance you offer, there’s certain information that you must provide each customer with 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 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, checking a customer’s credit worthiness is generally considered good practice when dealing with any form of consumer finance. To do this, 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.
If you're seeking finance for your own business, perhaps to facilitate growth or to hire a new member of staff, take a look at our flexible business loans or call one of our relationship managers on 020 7100 0110.
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