Point Of Sale Financing

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Point Of Sale Financing

Written by Mark Gregorski
Fact-checked by Caitlin Wood

Point Of Sale Financing

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Business Credit Financing Small Business

If you’re a business owner, you know the hard work and stress involved in running a profitable operation. It seems like a million different things could go wrong at any time, and you must have the confidence and tenacity to deal with all of them – sometimes simultaneously.

Success is not guaranteed in business, even in the best of times. A May 2018 Government of Canada study on the survival rates of new firms reported that only 43% remain in business after ten years.

While many factors can cause hardship for your business, failing to provide the best possible value for your customers is one of them. Consumer trends and preferences can shift suddenly, especially in today’s world of rapid technological advancement where everyone is spoiled for choice. Failing to keep up with them can result in falling sales and dwindling market share for your business.

Payment methods are one area where consumers demand greater flexibility, especially through online purchasing. Luckily, you can capitalize on this by adding point-of-sale financing to your business.

What Is Point Of Sale (POS) Financing?

POS financing is a credit option that businesses can offer to their customers to help them pay for purchases. It enables customers to obtain quick financing to pay for a specific item.

POS financing has been gaining traction in recent years, with consumers demanding increasingly flexible payment options. Credit cards still reign supreme when it comes to the funding of big-ticket items, but more and more people are hesitant to rely on them exclusively, for fear of amassing too much debt. This trend, coupled with technology that affords speedy credit checks and easy online transaction processing, has made POS financing more economically viable than ever before.

To remain relevant, many companies have given their payment platforms an overhaul to make them financing-friendly. 

How Does POS Financing Work? 

The POS financing process begins once a customer is ready to pay for their purchase. It can occur at a checkout counter in a brick-and-mortar store or on the payment page of an online retailer’s website. Here’s how the process works in each scenario. 

In-Store

Upon selecting their desired item, the customer chooses the POS financing option at the checkout counter. The POS system forwards their request to the financing provider’s website, where the customer enters some personal details to enable the financing provider’s software to evaluate their credit profile. The process can take between a few seconds to a few minutes. Once the financing company validates the credit details, the loan is issued, and the merchant receives the funds from the financing provider. The customer then agrees to a repayment plan, which usually consists of installment payments. 

Online

Once the customer adds their item to their virtual shopping cart, they proceed to the payment page to view available payment methods. There will be a POS financing option here. Once that method is selected, the request is sent to the financing company’s website, where the customer enters their details. Once the financing company’s software analyses their creditworthiness and issues an approval, the purchase is complete. Depending on the financing company’s offerings, the customer may be able to choose from a variety of repayment options.

How Does POS Financing Work Between The Merchant And Lender?

What’s occurring behind the scenes during a POS financing transaction is an almost instantaneous credit check on the customer. Once approval is granted, the financing provider forwards the loaned funds to the merchant. The financing provider is usually the party that assumes the credit risk of the customer failing to honour their repayment obligation.

So how does the financing company earn money and receive compensation for accepting the risk of customers’ default on loaned funds? The answer is that they charge the merchant various fees. The primary fee is tied to the origination of the loans, levied as either a percentage of the loan amount or a flat monthly rate. This fee can be thought of as a substitute for the interest charged on a standard loan.

Benefits Of Offering POS Financing

Implementing POS financing can be tremendously beneficial for your business. Here are some reasons to consider POS financing:

Broaden Consumer Reach

Offering an additional payment method can entice more people to purchase from you, especially those unable to make a large upfront payment. With a POS option, they’ll have the ability to pay in installments.

Increase Sales

Many POS financing systems are lightning-fast in their approval process. This makes it easy for customers who are strapped for cash to purchase items from you without the hassle of filling out complex forms or being subjected to a hard credit check. With the ability to reach more customers and process their financing applications swiftly, your sales can soar.

Assume Less Risk 

Since you won’t be the one lending money to your customers, you won’t inherit the credit risk that comes with it. As long as you pay the financing company the loan origination fees, you’re free from the risks associated with loan defaults.

Drawbacks Of Offering POS Financing

POS financing is not perfect. It has flaws that you should consider before deciding to incorporate it into your business.

Your Customers May Be Rejected

It could get awkward if an enthusiastic client’s application gets rejected. If enough customers get frustrated, it could result in many lost sales and a decrease in patronage to your business.

Your Products’ Prices May Disqualify You

Each financing company mandates different minimum loan requirements. However, some have no floor when it comes to extending credit. Ensure you know what the minimum loan amount is before committing to a POS financing contract.

It Could Be Costly

The fees to maintain a well-functioning POS financing system can quickly add up. These include loan origination fees, maintenance fees, set up fees, and employee training fees. There may also be minimum monthly quotas in place that you must meet.

It May Require A Significant Hardware Upgrade

If the financing provider cannot integrate their system with your existing infrastructure, you may have to spend additional money to get it in working order.

What To Consider When Choosing A POS Financing Provider?

If you’re interested in offering POS financing for your customers, consult with companies specializing in payment processing solutions. A great way to begin your search is to browse online lender comparison platforms. You’ll quickly get an idea of what lenders’ offerings are and their requirements for working with them.

Keep in mind the following items when evaluating a POS financing provider:

Cost 

Examine the fee structure for loan originations (percent of sales vs a flat monthly rate). Other fees you could be responsible for paying include the initial setup, equipment upgrades, and maintenance. Examine the fine print for hidden costs to avoid unpleasant surprises.

Minimum Loan Amount

Look for a provider that can loan the minimum amount required to meet your business needs.

Customer Default Policy

Knowing who assumes the risk for customer defaults is crucial. In most cases, the financing provider absorbs the credit risk, but you should verify this before signing the agreement.

Loan Terms

The financing provider should issue loans that are suitable for your clientele. Whether you require short-term financing or long-term financing will depend on the type of business you’re in. Also, confirm the time lag between a customer approval and when you receive a cash receipt from your financing provider. Timely cash receipts are vital to maintaining adequate working capital in your business.

Compatibility

Many consumers today meticulously track their spending and manage their finances online. As a result, you may wish to grant them the ability to check their loan details through their mobile device. Ask POS financing companies if they offer this service before doing business with them. 

Point Of Sale Financing FAQs

What costs are associated with POS financing?

The cost structure varies with each POS financing company. Some charge a single monthly fee, while others charge a fee based on a percentage of your sales. Other costs include setup fees, maintenance fees, and employee training fees. POS financing companies may also impose minimum monthly quotas.

What happens if a customer wants to return a product? 

Some financing providers utilize your existing return policy should the customer want a refund. Others rely on their own policy. If this is a concern for you, be sure to ask your financing provider for details.

Who assumes responsibility if a customer defaults on their loan? 

In general, the financing provider assumes the credit risk for loaned funds. However, you should do your due diligence to be safe; otherwise, you could end up absorbing the costs of customer defaults.

Final Thoughts

The recent explosion of technological innovation in the financial services sector has made POS financing an economically viable tool that benefits both businesses and consumers. Adding a POS financing payment option can help increase revenue, transfer credit risk for reasonable fees, and allow you to serve a greater variety of customers.

As with any new investment, ensure you understand the cost of a POS financing system thoroughly before implementing it. You don’t want to find yourself poorer at the end of each month while only your customers reap the benefits.

Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.

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