What is Retail Finance and How Does it Work?

Increasing product sales has been a challenge faced by every retail business since the beginning of retail, and continues on to this day. Alongside the increasing popularity of “Buy Now Pay Later” schemes, more and more companies are starting to explore other avenues of retail financing in which to improve upon the accessibility of retail products. Retail financing works by encouraging more product purchases without having to adjust the prices.

But what exactly is retail finance? And how does retail finance work? This article will be exploring exactly what retail financing is, how it works, and the benefits it can provide to both businesses and customers.

What is Retail Finance?

In its most basic terms, retail finance is a loan. A retail finance loan offers either payment instalments or credit facilities to a company’s customers that have a good credit rating. Retail finance allows a customer to spread out the cost of a purchase, which makes it both easier to afford and also encourages the customer to make the purchase in the first place. This cost is spread out either by a store card (essentially a credit card that can be used only for the specified retail company), or through a financing plan set up during purchase and covering an allotted period of time.

Although a straightforward idea, retail financing typically does not adhere to the “one size fits all” method, but rather has an abundance of different financing methods. Having a selection of different ways in which to offer these loans can make the financing appear more accommodating to customers. It can do this as having a range of different payment options allows the customer to choose a method that best suits their individual and unique situation.

Some of the main retail financing methods out there are as follows:

  • 0% Finance
  • Bullet loans
  • Buy Now, Pay Later
  • Finance with Applied Interest

All of the options mentioned above have their own unique way of financing the purchase of a retailer’s products, however they all have the same main objective – this being to boost a company’s sales by encouraging customer purchases without reducing the products’ prices.

0% Finance – the 0% finance method spreads the cost of a product purchase out over a set, prolonged period of time with no interest applied. This type of finance is a great, affordable way for customers who temporarily lack the funds to purchase products immediately, whilst also encouraging more sales for the business without reducing prices.

Bullet Loans – a bullet loan is where the total sum of a loan (including any interest that may be applied) is paid off in one lump sum at the end of the loaning period. This financing option is great for customers who temporarily lack the funds but are certain they will have them by the time the loaning term is up. Again, these types of loans are also great for retail businesses as they encourage customers to spend.

Buy Now, Pay Later – as mentioned previously, the “Buy Now, Pay Later” financing loans is one growing in popularity throughout the retail sector. This option, as the name suggests, allows customers to take products out on the day and pay for them at a time which is more convenient. This “pay later” period is determined before the customer purchase is made. Again, as with most of these finance loans, the “Buy Now, Pay Later” option helps customers to afford products when temporarily lacking the funds, whilst also encouraging, and thereby increasing, the company’s product purchases.

Finance with Applied Interest – one of the more common types of loans, the “Finance with Applied Interest” is offered over a certain, predetermined length of time, with a set amount of monthly interest applied.

How Does Retail Finance Benefit Businesses? 

There are numerous different benefits retail finance can offer for a business, being a solution to improving sales with little to no risk of damage to the actual business. As the loans are typically set up between a separate loan provider and the customer, retailers will not have to go through the laborious task of collecting back money from customers. Therefore, for retail companies, there’s really nothing to lose by using retail financing methods; these options only boosting sales through increased accessibility of products to customers. Other advantages include those as follows:

  • Reduction in cart abandonment
  • Increase in product purchases/sales
  • Improved customer retention
  • Increase in customer loyalty

In addition to all of the advantages stated above, another significant benefit that comes from using retail financing is the ease in which it can be set up; retail finance loans can be acquired via a simple and often easy to use application process, with approval given as quickly as 24 hours after a loan request submission.

How Does Retail Finance Benefit Customers?

As previously touched on throughout this article, retail finance can benefit customers by providing a means of purchasing a product even if they are temporarily lacking in funds. It creates an increase in accessibility of products to customers, and helps them to avoid the hassle of having to save up for long periods of time to purchase something that’s needed or wanted in the present moment.

Not only does this financing method increase accessibility for customers within the retail industry, it also can help loan borrowers to better manage their money. It does this by preventing the need to make expensive purchases (e.g. large items of furniture or expensive devices and gadgets), by offering an alternative, more manageable payment method stretched out over a set amount of time.