Principio Marketing

BOOK A CONSULTATION

 

SUBSCRIBE TO
OUR NEWSLETTER

(514) 849-2887


MY ARTICLES

TO OFFER OR NOT TO OFFER FINANCING?

There are several forms of financing that a company can offer to its customers. Is that a good idea? It depends on several factors. Here are some of the questions you need to ask yourself to find out if offering financing is right for you: Do you sell high priced items? Do you have a low or high profit margin? Does the customer leave with the product/service before paying the full amount?

Depending on the answers to these questions, here are a few options that you can offer:

- Credit card payments. This is a convenient form of financing that many companies offer without asking a few questions first. Who wants to pay cash? Your clients have to make a detour to the bank to make a withdrawal. But there is a cost associated with offering this convenience to your clients. Depending on the fees offered by banks and other payment services, this service can cost you between 1.5-4% per transaction. If you can afford it; go ahead, your customers will be happy. If your margins are low, debit card payment is an alternative. There are still costs, but they are more modest. To see the debit card pricing in Canada, click here.

- If you are selling high priced items and the customer leaves with the product/service before having paid the entirety of the purchase, then financing is essential. A few examples of industries that may use this payment option are: furniture or appliance stores, recreational vehicle dealers, renovation project contractors. Doing business with a company that is specialized in this kind of transaction is very important. There will be fees. But if you are not in the financing world, you will avoid mistakes, expenses, and reduce the risk associated with mismanagement of financing purchases.

Here are three types of financing that companies can offer themselves: 30 days’ net payments, splitting a project into milestone payments and a layaway plan.

Net 30 days financing is often associated with a discount for immediate payment. In my experience what I see most often is a 2% reduction for immediate payment. This kind of financing/rebate is offered to encourage quick payment and thus avoid the costs associated with reduced cash flow. If your customer pays you quickly, you have a larger cashflow which can be used to maximize your profits.

The other “financing” option is rather a different way of doing things that limits the risks associated with a large project involving a single payment. The idea is to split the project into intermediate milestones and corresponding payments. Thus you reduce the risk associated with non-payment and you can make the decision whether to continue with the project if a payment does not come on time. Computer companies, renovation project companies, and similar operations, are excellent candidates for this kind of approach. Of course this does not eliminate all the risks, but it reduces the impact that a non-payment might have on your overall operation.

The last option we will see here is the layaway plan. Strictly speaking it is not a form of financing, but this option helps the client to obtain goods/services that he/she would not be able to obtain otherwise. The strategy is for a customer to be able to reserve a good or service by making a deposit, followed by a series of payments until the full amount has been paid. As a retailer, you reduce your risk because the product does not leave your store until the full amount has been paid. But your policies must be clear; eg how long can the buyer make payments? What happens to the product if only partial payments have been made? Would you charge storage fees? Etc... Several retail operations offer this way of doing things.

Should you offer financing or not? The decision is yours, but at least with this article you have a basis for asking yourself the right questions.

If you have any questions or comments, do not hesitate to contact me.

 

Stéphane Elmaleh-Riel, B.Ed., MBA
Marketing consultant