How To Offer Finance To Customers In The UK

It used to be said that cash was king in business, but really today convenience is. When products and services cost a lot of money back in the traditional way of doing business, customers would have to save to afford it and then buy the goods or services all at once. But not anymore. Today customer financing is more important than ever, allowing customers to access your goods and services with manageable monthly payments, rather than paying for them all at once. Retail finance options are common today, also known as consumer finance, and so too is buy now pay later.

In fact, according to the “Adobe Digital Economy Index” report for Q1 of 2024 £3.95 billion was spent in the UK on buy now pay later service options – a significant increase from the previous year, indicating that this payment plan is not only more popular than ever, but is probably here to stay.

For your business then, it’s important to look at how you can offer a finance solution to your customers to help with their cash flow and ensure they can access your products and services without it being hidden behind a too-tall paywall. Whether you offer interest free credit or interest bearing credit is up to you, and so too is the credit limit you offer, but it’s important that you get it right or else customer loyalty could wane in light of you being seen to be taking advantage of your customers.

Below we’ll explore the different ways financing can be done, its pros and cons, and what businesses and customers should know.

What Is Buy Now Pay Later In The UK?

Typically, the way buy now pay later works is that customers get the service or product immediately, but then customers pay over time through monthly payments, usually with a delayed start to those payments. Sometimes, especially for very expensive products, the customers will be expected to pay interest charges.

To qualify for the option of monthly instalments, the customer must pass a soft credit check that is affordable for most. Unlike with traditional credit checks, you can apply online or in-store through various avenues. This just ensures that customers can actually afford the repayments you’re asking of them.

It helps to encourage customers to invest in your products now and spread the cost of the purchase in a more manageable way. Flexible finance options are almost universally seen as a positive thing from a customer perspective, which is why you should consider offering finance options to customers as a business.

BNPL Companies

The following are some BNPL providers that you will almost certainly have heard of. They’re also worth considering as a finance option for your business website:

• Klarna – Klarna is the global leader in BNPL. It’s known for its “pay in 3” instalments and financing options, allowing customers to spread the cost interest free over 3 instalments, rather than having to cover the complete cost of the product all at once.
• Clearpay – Clearpay is known for its four-installment payment plan. It’s used most often in fashion and beauty purchases, so if your business aligns with this, it’s almost seen as the norm today.
• Laybuy – This allows customers to spread payments over six weeks and is accepted by a range of retailers.
• Paypal Pay in Three – Paypal Pay offers a simple three-installment purchase point for customers when you offer this as an option to customers.
• Google Pay – Google Pay offers various monthly payment options.

The Pros And Cons Of Buy Now Pay Later

The following are the pros and cons of offering buy now pay later finance to your customers as a business.

First, the pros.

• Increases Sales – An ongoing research collaboration between PYMNTS and PayPal, titled “Buy Now, Pay Later: Millennials and the Shifting Dynamics of Online Credit“, found that BNPL options increase the likelihood of a sale by 20% to 30% and can boost the average sale by 50%. This essentially highlights that offering BNPL as a payment method is a sure way of increasing revenue, both because customers are more willing to buy if they can spread the cost of the purchase, and because those customers are more likely to buy bigger ticket items or add a few extra products to the basket when financing is offered.
• Attracting New Customers – Ascent’s 2021 Buy Now, Pay Later Survey showed that 55.8% of BNPL users have reported buying something that they wouldn’t have if not for the option of buying it through partial payments. This is a staggering figure, as well as pretty conclusive proof that you can attract customers you might not otherwise have attracted simply by having BNPL as a payment option.
• Competitive Advantage – With the other two pros above, it’s reasonable to make the statement that companies that do not offer BNPL will be at a disadvantage over those that do. If you want to position yourself as a modern business that can make a real impact in the business world, offering finance to customers is one of the best things you can do.

As for the cons.

• Potential For Debt – BNPL can encourage impulsive buying in some customers. A study from Buy Now, Pay Later and the Cost of Living Crisis (2023) found that one in ten BNPL users struggled to make repayments. This can result in difficulties in receiving missing payments from a business perspective, which can be a nightmare in terms of cash flow if you come to expect those payments.

Monthly Instalments And Traditional Credit

Buy Now, Pay Later offers great flexibility for a small business. Some businesses, however, deal with much larger purchases that would still amount to a lot of money in monthly payments. For those businesses, a traditional credit scheme is much more effective than BNPL.

As the name implies, traditional credit options, such as personal loans or store credit, are not anywhere near as new as BNPL. This offers a more extended repayment period as opposed to most BNPL offers, sometimes extending from a few months to several years.

From a business perspective, you’ll usually be able to charge interest for the credit options you offer here, since you’ll be allowing the customer to spread the cost even further than BNPL options. How much interest you charge will need to be fair and set across the board for all customers, but it can be a way of earning some extra money as a business, whilst still offering a fair way for customers to access your products and services without suffering the high upfront cost.

Understanding The Credit Process

The short-term nature of BNPL allows many companies to sidestep an in-depth credit check. But when a company is offering an expensive product or service over a long period, it’s considered a risk just like any other type of loan an individual might take out from a bank.

This means that a credit report is typically required. A customer’s credit file will be held by specific credit reference agencies, such as Experian and Equifax, who have details concerning their borrowing and repayment history. This information is then weighed up against the risks, which then determine interest rates.

This process is key as a business to stop yourself from getting burned. Some customers will be excluded from taking out credit in this way and for good reason – usually missed payments or high amounts of borrowing. Offering credit to customers like this will usually mean further missed payments and a potential legal headache waiting to happen.

Interest Rates – Promotional vs Charged Interest

One way to attract customers to your business is by offering promotional interest rates in your financing options. The difference between this and charged interest is that the interest rates are incredibly low for some time. Sometimes, the promotion is outright interest-free instalments for so many weeks or months.

However, it’s important to note that promotional interest rates are almost always time-limited. It’s important to be transparent about this, to ensure that customers make informed decisions, as the promotion has a high potential to generate a large amount of goodwill with customers.

A study titled “The Impact of Promotional Financing on Consumer Spending: Evidence from Credit Card Field Experiments” created by researchers at the Federal Reserve Bank of Chicago found that 0% APR (promotional interest) increased credit card spending by around 38% in the first three months of a promotion – that means that when interest rates are lower, customers tend to buy higher ticket items or more items when shopping with your business using a more traditional store credit model of financing.

Guidelines For Business Offering Finance

As we’ve already outlined, offering finance options is a great way to boost sales at your business. However, you have to consider the following guidelines to make sure your business is offering finance above board:

• Eligibility – Ensure that your criteria for eligibility are clear and focused. This may include minimum credit scores or income requirements. For BNPL, these credit scores can afford to be quite soft, as many who use these financing options are younger customers. But for traditional credit on larger purchases, it’s important to scale the interest monthly amount to the risks of lending.
• Fees And Charges – Transparency is key. The Financial Conduct Authority makes clear that fulll disclosure of all fees associated with BNPL, including late fees and late payments on an outstanding balance, must be clearly stated before a customer signs up to this financing option.
• Payment Terms – BNPL and sometimes traditional credit come with highly customisable and flexible repayment options. The schedule should be clear, provided upfront, and timely reminders should be offered to customers before each payment is due. Furthermore, for long-term deals, sometimes offering the option to delay payments can provide relief when times are tough, and can prevent missed payments altogether.

Conclusion

Overall, offering finance to your customers has been proven to increase revenue, and is an increasingly expected payment option. However, it’s always important to remember that good practice is to be upfront about all fees and expectations concerning your finance options.

FAQ: What happens if I miss a buy now pay later payment?

The consequence of missing a BNPL payment differs depending on the specific terms, the provider, the length, and if the plan will charge interest.

• Late Fees – Most BNPL providers will charge late fees for failing to make the monthly payments. Typically, the late fees are a percentage of the overall amount, something along the lines of 5%.
• Interest Charge – BNPL providers suffering from missed payments may end up charging interest on the outstanding balance. Over time, this can increase the overall cost of the product to the customer.
• Account Restrictions – Failure to meet monthly instalments several times can lead to the account of the customer being restricted if not outright banned.
• Credit File Impact – BNPL companies typically do not report missed payments to credit agencies. However, if missing payments continue to occur and the provider begins to suffer losses as a result, reporting may be on the table. This, of course, will negatively impact the customers’ credit scores.
• Debt Collection – Extreme cases of missing payments can result in providers turning to debt collection agencies as a means to receive their lost profits.

To help a customer manage their payments more easily, consider offering several popular options of BNPL companies as providers. This allows customers to easily consolidate their debts, instead of keeping track of several and coming up short. At the end of the day, a customer will always prioritise their immediate needs, such as groceries and home bills, over partial payments.