Many businesses may wish to offer finance to their customers. Whether that's offering goods or services on credit, by an extended payment plan--with or without interest charges--or as part of a hire-to-purchase agreement, financial services of this kind are regulated. In other words, you can't just put the systems in place and offer finance to your clients or customers.
You'll need to consider if you want to administer credit arrangements directly, or outsource loans to a third-party finance administrator. Much depends on the size of your organization, the assets at your disposal, and your business's current credit rating. But whichever way you decide to go, your first step must be to register with the relevant authorities.
In the United States, you need to get in touch with the SEC (Securities and Exchange Commission) and in the United Kingdom, the FCA (Financial Conduct Authority). It doesn't matter whether your company wishes to provide its own financial services directly to its customers or you intend to use an external financing company to handle credit arrangements on your behalf. In both cases, you need to inform the authorities, register, and follow good practice guidelines.
If you wish only to accept payments by credit card or allow payments by instalments without charging interest and over a short period, there's no need to register, you can just go ahead. Your business may also be exempt from registration if your finance agreements are strictly B2B (business-to-business), for example, with other companies in the supply chain. However, you should still check with your country's regulatory body to be sure of the current details.
The criteria you will need to fulfil in order to be accepted are mostly straightforward. They focus on demonstrating that you have, or can put in place, trustworthy systems and management mechanisms; that you have understood and will abide by fair conduct guidelines; and that your credit arrangements will be in line with the law. It's worth doing as much background research as you can and consulting with any potential third-party providers before you make a formal application to the regulatory body.
Deciding what kind of financing to offer to your customers can be complex. But most forms of credit offers are either store cards or POS (point-of-sale) loans. Typical POS finance includes "buy-now-pay-later" deals, or "spread-the-cost" instalment plans. You may offer free terms or charge interest. Businesses may opt to offer interest-free finance as a sales incentive. Charging interest increases the profit margin.
Whether required by law in your territory or simply as a matter of good practice, you will need to provide detailed information to customers about the terms of any credit arrangements they have with you. This information must be given in easily understood language before any agreements are signed. You should state the applicable APR (annual percentage rate), the total sum being financed, how much must be repaid, how often, and for how long, and details of any penalty charges for late or missed payments.
You need to carry out credit checks only if your business is offering cash loans. If your financing arrangements are limited to purchase offers, you may run credit checks, but are not obliged to do so. But it's a good idea, both to protect a customer from getting into financial difficulty, and to be sure you're likely to receive payments due. Credit reference checks are a cost you'll need to absorb into your financing systems, and you'll need to plan for them. If you have data-sharing arrangements with other organizations, you must tell your customers. They should also have a period, typically 14 days, within which they can change their mind and cancel the agreement.
Setting up your business to offer finance to your customers may be a good option for you. It can allow you to offer attractive deals to your customers and increase your bottom line. But it's also a complex landscape to navigate. You should always get expert legal advice first, or outsource to a reputable third-party provider who can handle the complexities for you.
