Should You Offer 0% Finance or Interest-Bearing Credit?

Navigating Retail Finance Choices: What’s Best for Your Business?

The decision to offer 0% finance or interest-bearing credit is more than a marketing tactic—it shapes your customer experience, bottom line, and brand reputation. Choosing the right option requires a clear understanding of how each works, who benefits, and what pitfalls to avoid.

Who Should Read This?

This article is for UK-based retailers and business owners considering retail finance options to boost sales and customer loyalty. Whether you’re a small boutique or a national chain, understanding finance schemes is crucial for making sound commercial decisions.

Key Concepts and Terminology

Retail finance allows customers to spread payments for goods or services over time. Two main types exist:

• 0% finance: Customers pay no interest over the repayment period. The retailer typically covers the cost of the finance.

• Interest-bearing credit: Customers pay interest on the amount borrowed, with rates varying by provider and product.

Key terms to know:

• APR (Annual Percentage Rate): The yearly cost of borrowing, expressed as a percentage.

• Deposit: An upfront payment, often required to secure the finance agreement.

• Repayment term: The length of time over which the balance is paid.

• Retail finance broker: An intermediary who arranges finance agreements between retailers and lenders.

Understanding these basics is crucial before weighing your options.

Finance Options: 0% vs Interest-Bearing Credit

0% Finance

Often seen as an attractive offer, 0% finance lets customers spread costs without paying extra. Retailers absorb the finance cost, usually as a fee to the lender or broker (typically 5–15% of the sale value). This can:

• Increase sales by reducing upfront barriers

• Attract price-sensitive customers

• Improve conversion rates, particularly for higher-ticket items

Interest-Bearing Credit

Customers pay interest on the amount financed, which can vary depending on the credit provider and the customer’s creditworthiness. Retailers may pay lower fees to the finance provider, or none at all. This option:

• Offers longer repayment periods

• May appeal to customers who prefer more flexibility

• Spreads the cost of finance between customer and retailer

Comparison Table

Costs, Impacts, and Risks

0% finance can boost sales but erodes profit margins due to provider fees. If not managed, it may encourage purchases from customers who would have bought anyway, diminishing its incremental value. There’s also the risk of customers defaulting, although most providers assume this risk.

Interest-bearing credit reduces retailer costs and can attract a different customer profile, but the added cost to consumers may lower uptake and potentially harm brand perception if not communicated transparently.

Key risks:

• Lower profits from hefty subsidy fees (0% finance)

• Reputational damage if finance terms are unclear

• Regulatory non-compliance (Consumer Credit Act, FCA rules)

Eligibility, Requirements, and Conditions

Finance providers typically require:

• Minimum trading history (often 1–2 years)

• Satisfactory credit checks

• Evidence of stable turnover and robust sales volumes

• Compliance with FCA regulations

Customers must pass affordability and credit checks, supply ID, and sometimes provide a deposit. Terms vary by lender and product.

How It Works: Step-by-Step

1. Customer selects product and finance option

2. Application submitted via provider’s platform

3. Credit and affordability checks completed

4. Agreement documents generated for signature

5. Deposit (if required) collected

6. Goods delivered or collected

7. Provider pays retailer (minus fees)

8. Customer repays provider over agreed term

Pros, Cons, and Considerations

Pros of 0% Finance:

• Strong marketing tool

• Faster purchasing decisions

• Higher average order values

Cons:

• Margin erosion from fees

• Not all customers qualify

• Risk of overextending credit

Pros of Interest-Bearing Credit:

• Lower financial burden on retailer

• Longer repayment terms

• Appeals to different customer segments

Cons:

• Lower conversion due to interest costs

• Potential brand impact

Careful calculation is necessary to ensure finance offers support, not undermine, your business objectives.

Things to Watch Out For Before Deciding

• Understand the true cost: Calculate the impact of fees and likely uptake on your margins.

• Regulatory compliance: Ensure all advertising and processes meet FCA requirements.

• Customer suitability: Not all customers will qualify—be transparent about eligibility.

• Provider reliability: Choose a reputable finance broker or lender with strong support.

• Communication: Transparent terms are essential to avoid confusion and protect your reputation.

Other Options and Alternatives

• Buy Now, Pay Later (BNPL): Offers deferred payments, often without interest if repaid quickly.

• Store cards: In-house credit options, but require FCA authorisation.

• Leasing or rental: Useful for high-value items.

• Third-party credit cards: Customers arrange their own finance, costing the retailer nothing but possibly losing out on sales.

Each alternative has its own cost, risk, and customer appeal profile.

Frequently Asked Questions

1. Does offering 0% finance hurt profits? It can reduce margins due to provider fees. However, it may increase sales volume and average transaction size, compensating for lower per-sale profits.

2. Are there regulations I must follow? Yes, the FCA regulates consumer credit. All promotional materials, processes, and agreements must comply with relevant laws and guidelines.

3. Can any retailer offer finance? No. Providers typically require a trading history, credit checks, and FCA registration or an appointed representative status.

4. What happens if a customer defaults? Most finance providers assume the credit risk, but terms vary. Check your agreement carefully.

5. How long does it take to set up retail finance? Setup can take from a few days to several weeks, depending on provider processes and FCA approvals.

6. Is 0% finance right for every retailer? Not always. It suits retailers with strong margins and high-ticket items more than those selling low-margin or low-value goods.

Taking the Next Step

Evaluate your product margins, customer base, and growth objectives before choosing a finance option. Speak with a reputable retail finance broker to explore tailored solutions. Transparent communication and robust compliance should be at the heart of your finance offering.

Disclaimer

This article is for informational purposes only and does not constitute financial advice. Retailers should consult with a qualified financial professional and ensure compliance with all regulatory requirements before implementing any finance solutions.