A woman scanning a phone across a counter at a retail store.

How installment payments can grow your business

Tuesday, October 21, 2014

Giving customers the ability to pay over time: Reward or risk?

Running a successful small business can be difficult. In the modern world, consumers have a multitude of choices – from what to watch on TV to where they shop and what products to buy. Part of the success of a small business like yours is helping to meet customer demand. A trend gaining in popularity is consumers utilizing installment payments for purchases instead of paying in full upfront with cash or credit card purchases. These financing options can come from the business or from a third party. So, in this article, we’ll take a look at installment buying and how it might benefit your business. We’ll describe what installment plans/payments are, how they work, the benefits, and the risks of utilizing them at your business. But, let’s first understand what installment payments are and how they work.

What are installment payments?

At the base level, installment payments are a way for buyers to purchase goods and services from sellers. But instead of paying the full amount up front, the buyer and seller agree to enter into a financing agreement where the buyer pays the seller with payments at regular intervals. This is called an installment plan or a payment plan. Depending on the terms the seller sets for the buyer, the buyer may provide the seller daily, weekly, or monthly payments. Note that it’s important to understand that these installments are personal loans.

One type of installment loan you may be familiar with is a mortgage. In a mortgage, the buyer takes out a loan with a finance company or bank. After making a downpayment, the home buyer pays monthly installments to the lender or mortgage servicer. Then, after paying off the principal amount and interest, the home buyer owns the home outright.

For retailers, there are two different types of installments – one with an interest rate and one with no interest. Some of these installments also require a consumer credit check before accepting the installment purchase.

For a consumer, the value comes because they can afford a higher purchase price without needing all of the money up front. Perhaps this is for one of the larger household appliances like a refrigerator or a washer and dryer. Or maybe it’s the newest gaming console. Either way, a consumer receives the product while paying it off with regular payments over time. This can obviously help your business because a consumer might purchase an item that they normally would not have due to not having the cash to pay in full and not wanting to put the purchase on a credit card and having to incur interest. The act of buying something now and then paying for it over time is known as Buy Now, Pay Later (BNPL). Historically, BNPL has been reserved for larger purchases, but installment payments now allow consumers to get their hands on just about anything using repayment.

Now that you know more about installment payments, let’s take a look at how utilizing them can help you grow your business.

How can installment payments grow my business?

The gaining popularity of installment payments has led many business owners like you to wonder, “Can installment payments help my business?” The answer is simple: yes. Let’s take a look at some ways installment payments can help your business.

Attract more shoppers and sell more

Consumers are almost always price-conscious. That means that they may shy away from making big ticket purchases if they have to pay it in a lump sum. However, installment payments are a great way for businesses to break down those big price tags for consumers. By offering installment financing, your business allows customers to still purchase big ticket items and have the confidence and ability to do so.

By making sure that your business offers financing, customers can say “yes” more often to your business on the sales floor. When you let your customers know you offer financing, you can expect more people to follow through on high dollar purchases instead of being driven away by the high price tag.

Earn referrals and repeat business

When a customer has a positive experience with a business, they are more likely to refer that business to family or friends. By offering installment payments, you’re not only demonstrating that your business helps to meet your customers’ needs, but you’re encouraging repeat business. That’s because each time someone makes an installment payment, they’ll be thinking about your business. That can encourage them to stick with you over the competition because they know you’ll take care of them. Furthermore, offering installment payments means referred and repeat customers will be more likely to buy from you. In fact, statistics show that the likelihood of selling to a new customer runs around 5 to 20 percent, but that number jumps to 60 to 70 percent when you’re dealing with an existing customer.

Consistent cash flow

Cash flow, which in simple terms is the total amount of money being transferred into and out of a business, is an important piece of any business. When you have positive cash flow, you're making enough money to cover your bills, and you could even reinvest in your business, expand operations, and hire more employees, if necessary. But when you have negative cash flow, you aren't making enough money to cover the cost of your operations. So keeping a positive cash flow should be paramount to your business, and installment payments can help with this positive cash flow. That’s because when you offer installment payments, you’ll have a consistent amount of cash coming in every month. With installments, it’s a little easier to predict the inflow and outflow of cash versus customers paying for an expensive item all up front.

Invest your time and money in your business

When it comes to installment payments, you can either offer them through your company or in partnership with a third party. While each has its advantages, offering installment financing through a third party can help you keep your focus on running your business. If you decide to work with a third party, keep in mind that they’ll take a percentage of the financed purchase, anywhere from 2 to 8%. You or the third party might also charge customers a percentage of the purchase as a finance charge. Make sure you’re clear with your customers on any charges and fees before offering installment credit. Again, each business’s situation is different and it’s important to weigh your company’s factors before deciding.

As you’ve seen, offering installment financing is one way you can help grow your business. By offering the ability for customers to spread out their purchases over a longer period of time, whether by offering financing directly or through a third party, you’re growing your business while offering another flexible payment option for your customers. This payment flexibility can help more customers choose your company over a competitor who doesn’t offer the same financing. However, as always, it’s important to evaluate your business’s needs to determine if installment financing is right for your business.

Ready to work with a payment processor who can help you decide if offering installment payments is right for your business?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.