Why Retailers Should Offer In-house Financing

At nearly every convention, buying group, association meeting, market or performance group gathering, retailers talk about how to improve their bottom line. The conversation usually centres on increasing sales or margins, reducing expenses or attracting more customers.

But while retailers are open to almost any idea that can generate additional profit, why don’t more of them consider financing at least some of their own sales?

It’s worth asking another question: Why has the number of finance companies eager to handle your customers’ purchases grown so rapidly?

The answer is clear: Financing can be extremely profitable. And if it’s profitable for them, it can be very profitable for you.

Pros of In-house Payment Plans
Most retailers rely on outside finance companies, banks or lease-to-own providers to finance sales made in their stores. In doing so, they are handing over finance revenues and profits that could be staying with them.
While those outside finance companies are convenient, there are compelling reasons why retailers should do some of the financing themselves.

Competitive advantage. Flexible payment options and personalized financing plans help set you apart from competitors and create deeper relationships with customers. When customers feel supported in meeting their financial needs, they’re more likely to return, refer friends and family, and make repeat purchases.

Improved cash flow. Yes, there is an initial investment required to build receivables. But as payments begin flowing back monthly, complete with finance charges, you create a steady, reliable income stream that cushions seasonal sales dips. In other words, your cash flow becomes less dependent on the ups and downs of retail traffic.

Enhanced marketing. Credit retailers collect valuable demographic and financial data that can transform marketing. Today, it’s your outside finance companies who benefit from that insight.

With in-house financing, you control the information. That means you can time offers strategically. For instance, when a customer is down to their last few payments, they’re more likely to be ready for another purchase. This kind of precision is the holy grail of retail marketing — reaching customers exactly when they’re prepared to buy.

Increased average ticket size. Many customers can’t pay for big purchases outright but are willing to spread payments over time. By offering that flexibility, you unlock larger sales opportunities. In fact, you can even combine in-house with outside financing.

If a customer is approved for only $2,000 through an outside lender but wants to spend $2,750, why not finance the remaining $750 in-house?

You capture the full sale and add finance income in the process.

Additional profit from sales. You don’t need to attract a single new customer; with in-house financing, you simply retain income that would otherwise go to a finance company. The interest you earn becomes a steady revenue stream, often far exceeding the costs of offering credit. Other profit sources like late charges or optional credit insurance can add to the total.

Many retailers ask, What interest rate can I charge? The answer will depend on your province’s regulations. But for context, look at store credit cards — most run between 29.99 and 36 annual percentage rate. Companies serving credit-challenged consumers often charge well over 100 per cent. Clearly, there is room for profitability.

Potential Cons of Consumer Financing
Of course, financing your own sales isn’t without challenges. The two most common concerns are cash flow timing and defaults and delinquencies.

While there is a short-term increase in cash needed as you build receivables, this is best viewed like an inventory investment: You must purchase inventory before you can sell it and create profit. The same applies to financing; once payments start rolling in, cash flow should turn positive.

As for defaults, some are inevitable. But with effective risk management and modern receivables software, delinquencies can be minimized and absorbed. The revenue from interest typically more than offsets losses.
Many retailers who take the plunge find these challenges are outweighed by the profitability and control gained through in-house financing.

Streamline with the Right Software
Software and technology have made financing far simpler than it once was. What used to be manual and time-consuming can now be automated, efficient and customer-friendly.

Look for software that supports centralized credit approval; automated underwriting and fraud prevention; electronic signing; text and e-mail receipts, billing and collection notices; multiple payment methods, including text-to-pay links; automated debit and clearing house payments; automated reference verifications; automated skip tracing; and intelligent, automated collection processes.

The most effective solutions integrate financing directly into your retail software systems: point-of-sale, cashiering, sales management, inventory, marketing and distribution. A fully integrated platform ensures financing becomes a seamless part of your overall operation.

Ronny Bensimon is a partner and president at Infinity Advantage LLC, the company behind InfinityX, a retail and finance software platform created specifically for furniture, mattress, appliance and electronics retailers. Ronny previously spent 44 years at Dearden’s, as a partner and its CEO. Dearden’s was a 10 store Southern California furniture retailer that made more than 90 per cent of their sales using in-house credit. Ronny can be reached out 310-365-9600 or ronnyb@infinityadvantage.com.