Does Your Business Need Consumer Financing?
If you run a business it is important to know whether you need to offer consumer financing options. Point-of-service consumer financing options such as instalment credit can benefit your business and customers, helping them get their hands on the tools, toys or home renovations they want. And Canadians continue to show they have an appetite for it: In just three months in 2013 almost $450 million of retail spending was paid for via financing. Yet how can you tell if your business or the products it sells are conducive for consumer financing options?
The Financing Threshold
Sales financing and training consultant James Plewak, who runs Ontario-based Strength Finance, says if you are regularly dealing with sales around $1,500 or more then it is time to seriously consider offering options such as instalment credit. “In the home improvement sector for example, for jobs over $1,000 the tendency is to maybe not put it on a credit card and look for another way to pay, depending on what is being bought,” he explains. This is backed by data: The latest Canada Mortgage and Housing Corporation (CMHC) figures reveal an estimated 1.7 million Canadian households spent an average of $13,709 on home renovations in 2011, of this 32% used some form of financing. Mr. Plewak says: “If there’s a $1,000 and a $1,500 option, someone might not want to spend $1,500 out of their pocket – but could do it for $20/month via instalment credit financing. You can also show customers what you can do for $4,500, and show them the minor difference in terms of monthly payments.”
Financing by Industry
There are no hard and fast rules dictating when a business needs to offer consumer financing. However industry experts broadly agree that if you are selling anything at or above the $1,000-$2,000 range then retail financing options need to be a serious consideration. This is the price range where customers may lack the funds for up-front purchases but do not want to tie up their lines of credit or credit cards. Here are some general industry-specific guidelines to help a business decide if it needs consumer financing or not, and on what products it should offer consumer financing on.
Skip Straight To Your Industry
The home improvement sector can be tricky because not only do jobs vary greatly in price and services rendered – the CMHC says a majority of customers will fund their purchases using savings or mortgage debt. Yet, financing can make a huge difference to most businesses, as Quebec-based Renovations Sans Limite found out. It used consumer financing as a way to secure more big ticket jobs, and recorded impressive growth as a result. Your business should offer consumer financing if:
- The price of the average item/job is around the $5,000 to $15,000 range, or you want more jobs this size.
- You are providing services or products that are of necessity, such as roofing or emergency repairs.
- You are ready to grow your business through the marketing, advertising and financing opportunities that retail financing affords.
Many people relying on tuition services to get ahead can find access to consumer financing invaluable. It can help families ensure all their children get all the support they need, while students can use it as gap financing when bank and government sources fail to provide all the necessary funding. Your business should offer consumer financing if:
- Prices are around the $2,000 mark (up to $15,000). If your tuition services cost less than $1,000 then consumer financing is probably unnecessary.
- If your education services are targeted at families. For example, a two-child family might not be able to afford tuition for both children, so financing can help solve this problem.
- Likewise, if your customers regularly want bigger tuition packages than they can afford up front (such as additional hours).
- For career colleges it can help student gap finance when they cannot get all the necessary funds from government or bank sources.
Consumer financing has long been used in the healthcare sector, particularly plastic surgery and bariatric care. Understandable considering surgeries generally cost way above the $1,500 threshold, where people start considering their payment options. An influx of new retail financing players entering the sector over the years has meant increasing competition and reduced rates for your customers. Here are some of the key factors influencing whether you should be offering financing:
- The price of the service you are offering is around the $1,000 to $18,000 range.
- Your business specializes in providing elective operations that fall outside of public health system or are not covered by health insurance.
- Your business services a younger demographic, aged in the 18-25 range, looking for plastic surgery or elective surgery.
- For customers who lack medical or dental benefits.
Power Products/Recreational Vehicles
All businesses in the power products and recreational vehicle sector should have consumer financing options. Products such as motorcycles, snowmobiles, ATVs and boats generally fall in the $1500-and-up price bracket where customers find financing helpful. Many purchases are also discretionary, meaning consumers benefit from an availability of payment options. The average sale financed in this industry is around $10,000. Here are some of key indicators that your business will benefit from embracing consumer financing options:
- Your business needs to increase its margins on sales: Instalment credit financing eliminates credit/debit card fees and can earn commission.
- Your business is looking to increase sales: Responsible consumer financing options mean the chance to sell on affordable monthly payments versus large up-front lump sums.
- Your business wants to sell more accessories: Financing such as instalment credit makes it easier to bundle the accessories your customers want into sales for only a slight increase in monthly payments.