The majority of businesses focus on two objectives to scale revenue: customer acquisition and the introduction of additional products and services. While there’s nothing wrong with that strategy, many companies are still leaving money on the table. Financing can be difficult. Creating a new revenue stream without more customer is possible. What if you could add additional top line revenue without acquiring additional customers or adding new products? Most small businesses overlook the idea of providing financing to their customers because it appears too complicated or risky. However, with a properly implemented strategy, financing can add significant revenue to a business without even increasing sales volume.
The key to successfully offering financing to your customers is to plan thoroughly and know your numbers. Many companies in retail, ecommerce, and even B2B products and services incorporate financing to grow their long-term revenue potential. One example of that is Diamond Banc, a jewelry equity lending company. Their CEO, Mills Menser, took over his family’s 100 year old jewelry business and soon realized he could significantly grow the company by adding a new financing and jewelry equity lending model. This helped him take their annual revenue from $2 million to nearly $8 million. The opportunity for a business to capture new revenue could be significant, but here are some elements to think about first.
What to Consider Before Introducing Financing
The first thing you need to consider naturally is the overall creditworthiness of your customers. Financing luxury purchases that considered more discretionary items could carry a default risk if you do not know the customer you are lending too. Implementing a process to evaluate this risk is important.
Products that are viewed more as a necessity item could be a different story. Offering financing accomplishes two things: it can help ensure a sale occurs by providing a more convenient purchase option, and it can also increase the average purchase amount, as you are extending higher purchasing power.
“Outsourcing financing solutions are generally the most cost-effective and simplest method, and it still allows clients to get approved on the spot and for you to close the deal immediately,” explains Menser.
Know Your Cash Flow Needs
One obvious consideration before introducing financing is that the immediate cash flow that you collect from a sale up front will be less if you are financing all or part of a customer’s purchase. You need to know what the implications on your cash flow will be and whether you will still be able to cover your operating expenses on this new receivable schedule. Luckily, there are options to mitigate this and be able to enjoy the benefits of providing financing without running into a cash crunch.
Menser took a straightforward approach. “Set up a credit line for your business to borrow money solely for this purpose and charge your clients a spread on the interest rate,” he says.
When a customer is approved for credit to purchase your service or product, you would then fund the operating account with the proceeds, just as you would if it were a traditional purchase, and then collect the loan balance from the client to pay the lender back. The interest spread then becomes your profit.
How to Determine if Offering Financing is Worth Exploring
While it’s a relatively simple concept, rolling out a financing option creates an entirely new division within your business. You have to be fully prepared and able to take on the additional workload.
“You have to be prepared and willing to invest capital, manpower, systems, and software to do it right,” explains Menser. “You also have to be fully prepared to execute collection efforts and stay informed, educated, and up-to-date on legal and compliance issues.”
Offering financing is best-suited for businesses that have customers that do not generally have high creditworthiness, and they offer a product or service that isn’t typically easily financed. These are the situations that allow for higher spreads and returns.
How to Evaluate the Risk and Reward
While highly appealing, offering financing isn’t going to be ideal for every business.
When evaluating the risk and reward, you have to consider basic underwriting standards. There are plenty of resources available online that can help you better understand the potential pitfalls, as well as the potential rewards.
Menser suggests hiring a consultant to help you determine whether or not financing is a good fit for your business, explaining, “A consultant will help you evaluate the opportunity, from what interest rates to charge, the credit profiles you should extend financing offer to, as well as the financing terms to extend.”