When it comes to offering finance to customers in the UK, business owners have two basic options; they can either administer the customer finance themselves or work with a third party financing company to run the credit operations on your behalf.
- Decide what type of finance you want to offer
- Choose a financing firm to manage the finance unless you’re doing this yourself
- Register your business with the Financial Conduct Authority
Whilst setting your business up to operate either of these finance models is relatively easy, there are strict rules and regulations that must be followed when you want to offer finance to customers in the UK because consumer credit is a heavily regulated practice.
Introducing Customer Finance
Being able to offer finance to your customers can be a positive selling point and a great way to reach new customers that may otherwise not be able to purchase your goods or services due to high up front costs. If you think that offering finance could be a good business decision, then you’re probably looking for answers on how to offer finance to your UK customers.
In this article, we will take you through the key things you need to know about offering finance to your customers, from how to go about setting it up, choosing the best finance partners and registering with the Financial Conduct Authority.
What Does Finance Mean?
In the context of offering finance to customers, finance means that customers can take home the goods and services that they want without having to pay for them, in full, at the time of purchase. Instead, your business (or a third party working on your behalf), will essentially be providing the customer a loan service, referred to as finance.
Customers are required to pay back the amount owed at regular intervals until the total value of the loan is settled. Repayments often include interest too, so although the customer has the convenience of spreading their payments whilst acquiring an item without paying for them upfront, they do ultimately pay more than they would if paying the full value of the goods in one lump sum unless interest free payment options are provided.
You can choose to offer your customers a variety of finance options. From a store card with credit limit to point of sale POS finance on goods and services. For both options, interest free credit options are a popular way to entice customers in but finance that comes with interest rates will help you as the business owner to get a better return due to more opportunities for interest margins and commissions with the finance operator.
Registering with the FCA
Registering with the Financial Conduct Authority is compulsory for any organisation that wants to offer finance services to its customers. This includes hire purchase options, credit facilities or lending money to customers in any other way.
You must register with the FCA even if you are just introducing customers to a finance company. The good news is that this registration is a fairly straightforward process that can be done online.
You need to be able to confirm that you will treat customers honestly and fairly whilst meeting all credit requirements set out by the law. Be aware that if you breach any of the rules, the FCA can revoke your finance licence at any time which could be detrimental to your business.
There are a few exceptions where you don’t need to register including:
- If you only accept credit cards (when you don’t issue the cards yourself) or if you let customers spread the cost by paying for goods in four or fewer installments without interest within one year of purchase.
If you decide to use a third party to manage the financing options that you offer to your customers, then you should carefully consider the following points to ensure that you select a financing partner that will support you in offering the very best service to your customers.
Their customer service
How easy the company is to work with and get hold of will directly impact your customers’ impression of you and your business too.
Their credit rating requirements
Consider your target customer when selecting a finance provider because ultimately it’s the customer that needs to be approved for and qualify for the finance. This often requires a good credit score but third party finance providers vary in how strict they are on this criteria. So if your typical customers are likely to have particularly low or high credit scores, this could be a key factor in which company you partner with.
Not all products and services are covered by all finance companies as some will operate a minimum cost threshold so it’s important to check the types and costs of goods you’re offering are eligible for payment plans offer by your chosen financing company.
What Must I Do When Offering Finance?
We mentioned at the start of this article that finance products are heavily regulated and some of the most stringent regulations surround customer data and the information that you must share with your customers.
For example, for every type of finance you offer, you must provide customers with:
- the annual percentage rate (APR) you will charge
- the total amount financed
- details of how much they need to repay and when
- details of any other charges that the customer may incur, such as charges for missed or late repayments
- A cooling off period in which they can cancel
You must also tell the customer if you will be passing their details to any third parties which you would need to do in order to conduct a credit check.
You don’t have to conduct credit checks on customers if you’re only offering credit on purchases but it is generally considered good practice to do so. There may be additional costs from the credit reference agency to do these checks which you will need to factor into your business costs when evaluating if offering finance is the right option for your firm.
What Does It Cost To Offer Finance?
Offering finance to your customers comes with a cost to your business. This means that you should always weigh up the cost of the finance service vs the income you stand to make from increased sales in order to see if offering finance to your customers is a viable business decision.
The exact costs to you will depend on the finance provider you choose as each will have their own fees and incentives. Some will be free, but most will charge you a percentage of each sale made and some will charge a regular monthly fee.
There is of course a cost to your customers too, as finance packages come with interest payments and those that are particularly high may well be avoided by customers with tight budgets.
Offering finance to customers is a relatively easy process to set up but should be carefully thought out to ensure it is the right decision for your business.
If you have any questions regarding providing finance to your customers or are considering managing this yourself rather than via a third party, it would be beneficial to speak to a lawyer specialising in these matters to ensure you remain compliant and have the best understanding of what is involved.