Understanding different retail finance options

Friday 12th May 2023

Man in a checked shirt unpackaging a package sent by a retailer

There are three main types of retail finance solutions you can offer to your customers:

But what are the benefits to you as a retailer, and to your customers?

In this guide, we share the key differences between our different credit options and explain how you can harness the benefits to boost your sales.

About interest free credit

Interest free credit allows customers to spread the cost of a big purchase over a set period of time without incurring any interest.

Whether they shop online or in-store, customers will be able to pay for their item over a series of monthly repayments rather than having to pay the full amount upfront. Customers will only pay back what they owe for the item itself without needing to pay the lender any interest. This makes interest free credit a particularly enticing finance option, as borrowing is a free-of-charge option for the customer.

What’s the catch? For customers, there isn’t one. Paying for their item or service with an interest free payment plan won’t cost them any more than it would by paying in cash or by card. Of course, if a customer defaults on their account, this will have an adverse effect on their credit score which could make it more expensive or limit their ability to borrow in the future. But with robust credit risk and affordability checks in place, Novuna Consumer Finance ensures credit is only offered to applications who are likely to be able to make their repayments. This ultimately helps to ensure the repayments are sustainable for the customer, so they can remain in a healthy financial position.

The benefits of interest free credit for retailers

For retailers, offering interest free credit comes with a myriad of benefits. The ability to offer a more affordable way to pay for a big purchase – at no cost to the customer – is a valuable marketing tool.

  • Encourage more customers to shop with you by giving them a free and convenient way to spread the cost of their purchase
  • Avoid abandoned baskets and close that sale
  • Increase your cash flow
  • Increase average basket price
  • Improve customer loyalty by demonstrating outstanding customer support

All retailers have to do is pay a subsidy to their chosen finance provider (which, if you’re reading this article, is likely to be Novuna Consumer Finance), to cover the cost of their customers borrowing money. The lender will then take on the credit risk, leaving retailers with no stress or responsibility when it comes to recouping the money lent out.

While interest free credit is likely to appeal to your customers and result in more sales, subsidising the cost could reduce your margins. If you’d prefer to pass on the costs to your customers to make sure offering retail finance is a cost-neutral option for your business, it’s worth considering interest bearing credit.

About interest bearing credit

Interest bearing credit works in a similar way to a personal loan, in that customers can split the cost of their purchase into more manageable monthly instalments to be paid over a set period of time. A fixed rate of interest will be added to the monthly payment.

The interest rate customers are charged is chosen and fixed by you, the retailer. This means, in some cases, interest bearing credit can be a cost-neutral option for retailers. Customers are offered a convenient way to spread the cost of their purchase without you needing to contribute towards the cost, as your customer will pay interest to the lender directly.

Retailers also have the option to pay a subsidy towards the interest bearing product, which can in some cases help to lower the APR for customers. This can make the retail finance option more desirable to customers which heavily contributes towards a closed deal.

The benefits of interest bearing credit for retailers

Offering a more manageable way to pay is increasingly becoming a necessity for retailers, and interest bearing credit offers just that.

  • Boost sales and ultimately profit
  • Increase average order value
  • Reach a wider range of customers by making your products and services more accessible
  • Cost-effective option for retailers, as customers pay the interest as part of their monthly repayments

Interest bearing credit is particularly suitable for customers wanting to spread the cost of a large purchase over a longer period of time, where paying for the item or service upfront or over a short timeframe just wouldn’t be possible.

About buy now pay later finance

Novuna Consumer Finance’s buy now pay later product allows customers to spread the cost of their purchase following an agreed deferral period. For example, customers could buy a product today and not pay a penny for it until up to 12 months later. After the deferral period has ended, customers will be able to spread their cost over a series of fixed-rate monthly repayments.

Customers also have the option to settle within their deferral period without incurring interest charges. For retailers who choose to charge an early settlement fee, the cost to customers will be just £29. This is a cost-effective option for customers ready to pay for their product sooner than expected.

The benefits of buy now pay later finance for retailers

Working with a reputable consumer finance provider allows retailers to offer customers a structured, affordable way to pay for their products or services:

  • Gives customers instant gratification
  • Increase accessibility of products and services by allowing customers to defer their payments
  • Deliver enhanced flexibility, with customers able to settle early to avoid interest charges

Setting the record straight on ‘buy now pay later’ products

‘Buy now pay later’ is an often-misunderstood form of retail credit. It’s commonly confused with unregulated schemes that allow customers to simply split the cost of their payment into small chunks over a short period of time (for example, a small purchase split into three payments to be made over six weeks). This type of product is commonly referred to as ‘buy now pay later’ yet it is a completely different offering to our buy now pay later credit solution.

Regulated ‘buy now pay later’ retail finance

Unregulated ‘buy now pay later’ products

Your customers can buy a product now, and not pay a penny towards it (excluding the deposit) for up to 12 months

The cost of a product is split into a small number of payments to be made within a few weeks or months

Most suitable for large purchases, such as furniture or home improvement projects

Most suitable for small payments, such as clothing or household items

The finance product is regulated by the FCA, which puts the fair treatment of customers front and centre

These products are unregulated, so consumers are unprotected

With affordability and credit checks in place, credit is only offered to customers who are likely to be able to afford the repayments

Affordability and credit checks aren’t in place, putting customers at a greater risk of falling into debt

A hard credit check may be conducted, which will be recorded on a customer’s credit report

More easily accessible to any customer, even those who may not be able to afford the repayments

Transparency around the amount of interest charged following the deferred period

There may be hidden charges or high late fees, leaving customers in a potentially large amount of debt

Missed or late payments will be recorded on a customer’s credit file, which could make it more expensive or more difficult to borrow in the future

Missed or late payments will be recorded on a customer’s credit file, which could make it more expensive or more difficult to borrow in the future

Working with a reputable finance provider should be top of the agenda for retailers. This ensures all finance options offered are fully regulated, which ultimately serves to deliver a fair service to customers.

Allowing customers to potentially take out credit they can’t afford not only puts your customers in a challenging position, but it ultimately reflects badly on your business. So it’s always a more ethical option to work with a finance provider that will conduct the relevant credit risk and affordability checks ahead of offering customers finance.

How to choose the right retail finance product for your business

Our expert onboarding team and dedicated relationship managers have been working with businesses like yours for years. They know what credit solutions appeal to your customers and how to help you boost sales by offering finance.

We’ll work closely with you to understand your business needs and work together to select the finance products to suit you. You may choose to offer just one form of credit or give your customers the flexibility to choose between all three types: interest free, interest bearing and buy now pay later. You’re in the driving seat.

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