Despite the plethora of potential benefits, many businesses are cautious of in-house financing, where they extend their own credit terms to customers. As we’ve mentioned before, the concept of store credit is nothing new, but while the small-town convenience store clerk knew his customers personally, and could track a few payments on a handy note-pad, the model can seem unsustainable in a modern business environment. Running and servicing multiple loans based solely on goodwill toward the consumer can turn out to be risky and time consuming. The hard truth is that in many cases, without an airtight, automated system, doing your own in-house financing is simply a bad idea.
Take, for example, a business that launches their own in-house financing plan, and organizes all their loans on a spreadsheet. Seems like a good step in the right direction. They allocate time from one employee as a billing manager, spending a few hours each week tracking and collecting the payments. Within the first month, they have 50 payment plans on the books. However, out of those 50, about 5-10 default each month. Suddenly our billing manager’s workload has doubled, as she must spend hours making calls and attempting to collect the payments. Given that she still has her day job, this extra task has now become a headache, and falls by the wayside as her daily work needs to get completed. The result is that more payments slip through the cracks. All in all, this results in a loss for the business.
It’s no wonder many small businesses have come to the conclusion that in-house financing is a bad idea, or at least out of their reach. However, if the business utilizes an automated system to track and collect payments, along with a system to run banking, credit, and fraud checks, all of the above operational deficiencies can be mitigated. Running the proper checks on potential customers can reduce missed payments, and advanced loan servicing software can take care of all the billing and collecting duties required of our poor, overworked billing manager.
Across the board, more businesses are discovering that this system makes in-house financing effective and realistic, effectively expanding their customer base and generating wealth through interest on their own loans. Next week, we’ll take a look at some numbers from two businesses on opposite sides of the spectrum — a Dental practice and a mattress retailer — and show how comprehensive in-house financing proved a reliable and effective tool for their unique business needs.