Consumer Financing

What Are The Risks Involved In Offering Consumer Financing For Small Businesses


Business financing for customers lets customers enroll in a payment plan to buy goods or services they wish to own but cannot afford the one-off payment. Like using a credit card, consumer financing enables your target customers to make more comfortable and faster-buying decisions. Besides, there is a higher chance of getting repeat business and an increased average order value.

However, just like other business decisions, consumer financing for small business comes with pros and cons. So, what are the risks involved in offering consumer financing for small businesses? In this post, we analyze the risks that a small business that is offering consumer financing faces. Are contemplating consumer financing for merchants and worried about the risks involved? Keep reading for an overview of the risks associated with customer financing.

1. Potential For Bad Debts

One of the most significant risks associated with consumer financing for merchants is the potential for bad debts. As you may be aware already, consumer financing translates to selling on debt. Unfortunately, not every customer will payback. Whether it is because of a sudden change of consumer’s financial state or undetected longer-term issue with financial stability, some consumers may never pay up the debts.

Fortunately, modern technology allows small businesses planning to venture consumer financing for merchants the opportunity to predict credit decisions with confidence. Therefore, lenders and enterprises offering customer-financing programs for small businesses can identify 30% more profitable borrowers. This is in contrast to using traditional credit screening.

Therefore, you do not need to worry about lousy debt anymore, as you can use the power of modern technology to analyze consumer data and make better financing decisions. This is through the use of AI techniques that search overlooked data points to identify more creditworthiness.

2. Cash Flow Constraints

Offering consumer financing for small business can affect business cash flow adversely. The effect occurs when many customers begin purchasing on credit. Therefore, depending on how fast your plan requires repayment, you could be left with little cash at hand to finance your operations.

Small businesses can use technologies that allow top employee monitoring software predictive data-driven insights to determine when to stop lending through the consumer-financing program. Through such technology, the company can reduce the risk of running into cash-flow problems. Therefore, you pay the suppliers on time while other business operations do not come to a stop due to uncollected debts.

An alternative solution to cash-flow problems when offering small business consumer financing is applying a short-term cash flow. Alternative lenders provide credit within 24 hours, so your business gets money to manage suppliers and normal business operations.

3. Problem Keeping Up With Accounts Receivable

There might be a problem with collecting payments for small businesses, especially sole proprietorship and even partnerships. This is especially where you do not have a full-time employee to follow up on repayments. Therefore, you may be forced to employ someone to be in charge of accounts receivable.

Consumer Financing

4. Legal Issues

With consumer financing for businesses, there is a possibility of disputes and conflicts. Customers could refute and challenge specific requirements or charges. Therefore, if you are not already briefed on the legal responsibilities, you may end up making decisions that result in a legal suit.

To avoid legal issues, you may want to hire an attorney to help you ensure no legal battle with customers. While this may feel overwhelming, you may want to leverage the options offered by different consumer financing companies. However, if you prefer running your customer financing service, you can hire an attorney or establish an in-house legal team depending on your business size.

Therefore, consumer financing of merchants comes with a set of challenges. All that a business needs to do is ensure proper strategizing to avert the obstacles. We have seen that modern AI-enabled systems can help a company make important decisions to do with consumer financing.

Therefore, consider investing in a system that allows you to check the customer information firsthand before approving the financing application.