Which Consumer Financing Option Should Your Business Offer?


CEO at Novae, accelerating the revenue of businesses with consumer financing, business funding and credit-building services.

The popularity of consumer financing has exploded in recent years, and it’s easy to see why. Consumer financing offers customers the ability to pay for purchases over time rather than all at once, and industry giants such as Klarna and Affirm report that retailers that offer their financing options to customers see their average order value increase by 45% (Klarna) up to 85% (Affirm).

You may know consumer financing better by the term “BNPL” (buy now, pay later), or as “that option that allows me to pay only a quarter of the price for this product today” or “that no-money-down program.” While many retailers and consumers alike are reluctant to make use of BNPL features, the reality is that these financing options are typically designed to carry little to no risk of nonpayment to retailers. In fact, many retailers make use of third-party-backed loans to ensure they are paid for their goods and services even if consumers can’t make their installment payments on time.

When designing my own consumer financing options to offer to my client businesses, I had to dig deeper into the mechanics of consumer financing and the different options that are available to business owners seeking to make their products and services more accessible. Here’s what I learned.

Direct-To-Merchant Financing

For consumer financing to work, businesses have to be confident that they will be paid in full for their goods and services, even if the customer isn’t paying the full amount right away. To accomplish that, consumer financing options allow businesses to be paid in full upfront, with the expectation that loans will be repaid to the lender over time. There are two ways to arrange these loans: direct-to-merchant and direct-to-consumer.

In direct-to-merchant financing, the business selling the product or service is paid in full for the sale upfront by a lender. In exchange for a small fee paid by the merchant on the transaction, the lender makes it easier for the customer to press “buy” by breaking the purchase up into more affordable payments that the customer will pay back directly to the lender over time. Companies like Klarna and Affirm offer these types of loans.

In order for a business to offer direct-to-merchant financing, there are minimum requirements depending on the lender. Compared to direct-to-consumer financing, there may be lower financing limits (often around $35,000 per customer), stricter credit score requirements (often a personal credit score of around 620 is required for the principal owner), and businesses offering this kind of financing may be required to have a certain minimum annual revenue to prove they can cover any type of shortage in case of fraud or customer disputes.

Since the same retailer may receive funds from hundreds or thousands of these loans per month as consumers buy high-value items using financing plans, lenders seek merchants who have demonstrated a clean criminal and business track record, as well as active registrations with their secretary of state’s office. Select direct-to-merchant financing options can offer consumers up to 10 years to pay back the money the business receives upfront after the purchase has been made.

Direct-to-merchant financing options may be ideal for driving sales for merchants who sell moderately priced items ranging from a few hundred dollars up to a few thousand. There are few financing companies that offer limits in the tens of thousands of dollars.

Direct-To-Consumer Financing

For retailers selling higher-value items, and for small or recovering businesses that may not meet the requirements for offering direct-to-merchant financing, you can still offer customers a “buy now, pay later” option on very large purchases, or purchases from small businesses, through a direct-to-consumer loan.

With these loans, it is the customer who receives the funds for their purchase, not the merchant. Direct-to-consumer loan applications are typically processed within days and may yield up to $100,000 worth of funding per loan, depending on the lender or financing platform offering the loan. The customer then pays the merchant for their product or service upfront and pays the lender back over time. Lenders offering these types of loans include SoFi, Upstart and LendingTree.

Because funding loans directly to individual customers is less risky than funding loans on behalf of the consumer directly to the merchant, larger amounts can be borrowed per loan, and credit score requirements are lower (consumers with credit scores as low as 500 can obtain financing in some cases). However, it’s important to know that payback terms are typically shorter; consumers may have six years or less to repay the loan.

Considering Your Options

Some businesses may choose to offer both direct-to-merchant and direct-to-consumer loans. Direct-to-merchant loans may work to more powerfully encourage smaller purchases, while direct-to-consumer loans can allow consumers spending more than $35,000 the opportunity to carefully consider their decision while taking responsibility for the loan themselves.

Here’s my final advice on considering which type of consumer financing to offer:

• Determine whether you’re likely to qualify to offer one type of financing over the other upfront.

• Make a decision on whether it’s important to get your funds directly from the lender or from the customer. I think most businesses would say they want payment directly from the lender to cut down on extra steps in receiving their money; however, direct-to-merchant loans may involve paying merchant fees.

• Consider raising your prices. By offering a financing option, it makes upfront purchases more obtainable for potential customers. This means your profit margins could increase dramatically by you delivering the same service/product.

• Lastly, make sure the financing company can deliver. Do your research to ensure you’re going to get what they promise.

As with all loans and finance services, individual approval can’t be guaranteed for either merchants or consumers until the application is actually reviewed by lenders. But with a growing number of lenders becoming involved in consumer financing and the evolution of financial technology, the options for merchants seeking to increase sales by offering financed payment plans grow with each passing year.


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