In-House vs. Third-Party Financing: Which Is Better For Customers?

Some businesses offer customers the option to pay for purchases in installments with a loan. This way, customers who cannot afford to pay the total amount upfront can pay back the loan with interest over time.

 

 

How To Offer Customer Financing

Customer financing is common for buying assets like construction equipment, farm machinery, trucks, trailers, and airplanes. With this option, your business can secure more clients faster and increase sales. Also, customers can have their newly purchased items immediately and pay for them over time.

 

Two common types of customer financing are:

• In-house financing operated internally by your business
• Third-party financing service from a partner company such as Currency

 

Both types provide similar customer experiences. The differences apply mainly to the business owner because each type requires different resources for successful loan application processing.

 

What Is In-House Customer Financing?

When your business offers in-house financing, that entails directly offering customers loans and other funding solutions to customers. This means you are responsible for implementing your financial and loan processing software, handling customer payments, and more. This also means a reduction in your initial revenue following a purchase because customers will repay you in predetermined installments over time.

 

Pros

There are benefits to offering in-house financing. For example, you can:

• Control terms, interest rates, approval criteria, and payment plans for your customers
• Improve customer loyalty and help build your brand

Cons

Managing customer financing internally will require additional resources, such as a dedicated team, developing additional systems, and time. For example, you will have to:

• Create a dedicated department
• Develop a credit assessment process to evaluate customers’ creditworthiness (FICO score or credit history, for example) and establish appropriate loan limits
• Stay up to date on the latest rules and regulations related to lending, including possible additional license requirements
• Add solutions to automate and streamline the loan application process and ongoing account management
• Ensure a seamless experience, quick approval, and minimal paperwork for customers applying for financing
• Educate your salespeople about your business’s customer financing offerings
• Assume and account for the risks on your business’ cash flows, such as defaults or late monthly payments

 

What Is Third-Party Financing?

If you opt for a third-party solution, your business will collaborate with external financial institutions. This partnering company will handle customer vetting, loan approvals, and payment collections. In addition, your business will receive funds for the sold item in your merchant account within one week after the purchase.

 

Pros 

• Third-party services offer a more streamlined and efficient financing process, saving your business time and resources.
• External providers bring expertise in credit assessment and risk management. You don’t have to dedicate additional time and resources to the process.
• Specialized third-party financing organizations have robust processes that can be integrated into your sales process, resulting in a simple application and approval process.
• Third-party customer financing companies allow businesses to scale their sales without expanding internal infrastructure.

 

Cons 

• Some third-party services charge a monthly fee, while others take a percentage of the total item price or each installment.
• Some services have a minimum purchase threshold before customers apply for financing (i.e., a $1,000 minimum purchase).
• Third-party companies often have predetermined terms and conditions for their loans.

 

 

4 Tips For Choosing A Third-Party Financing Partner

1. Research reputable services available and find the one that aligns with your values.
2. Negotiate customer loan terms and conditions with your brand values and customer expectations.
3. Ask whether the third-party organization will require any monthly fees or percentages from your customers.
4. Ask your third-party organization if they have a “purchase minimum.”

 

Fast & Easy Third-Party Financing With Currency

Contact the Currency sales team if you need help with customer financing for your business or dealership. We provide services for dealers in heavy machinery, agriculture, commercial transportation, and other industries. Learn more about our customer financing options in the U.S. or Canada by contacting us via this form.

 

Read more about customer financing in this guide and learn how to set up financing and protect your business from the risks of this endeavor.