What You Need to Know Before Offering Finance to Customers

Why Consider Customer Finance?

Offering finance options can set your business apart, making big-ticket purchases more accessible for customers. Yet, the decision to provide finance is not simply about boosting sales: it involves legal obligations, financial risk, and long-term customer relationships. Here’s what every UK business should understand.

Who Should Read This?

This article is for UK business owners, directors, or managers considering introducing finance options for customers—whether you run a small retail shop, a service provider, or an established chain. If you want to boost sales while staying compliant and informed, read on.

Breaking Down Key Terms

Before diving in, it’s crucial to understand the terminology:

• Retail Finance: A loan or credit facility offered at the point of sale, allowing customers to spread payments over time.

• APR (Annual Percentage Rate): The total yearly cost of borrowing, including interest and fees.

• Broker: An intermediary (like Kandoo) arranging finance between the customer and lender.

• Lender: The financial institution providing the funds.

• Regulated Activity: Many finance products require firms to be authorised by the Financial Conduct Authority (FCA).

• Credit Agreement: The contract outlining repayment terms, interest, and obligations.

Understanding these terms not only ensures compliance but also helps you communicate clearly with customers, building trust.

Your Finance Options Explained

There are several ways businesses can offer finance:

• Interest-Free Credit: Customers pay no interest for a set period. The business usually subsidises the interest cost.

• Interest-Bearing Credit: Customers pay interest, making this option more affordable for the business but less attractive for buyers.

• Buy Now, Pay Later (BNPL): Customers defer payment or pay in instalments. Popular with online retailers, but under increasing regulatory scrutiny.

• Third-Party Finance Providers: Partnering with a regulated broker or lender who handles the finance, reducing your compliance burden.

• In-House Credit: You lend directly and collect repayments. This is complex and subject to stricter FCA regulation.

Choosing the right option depends on:

• Your cash flow needs

• Customer preferences

• Regulatory requirements

• Administrative capacity

The Financial Impact: Costs, Returns, and Risks

Costs:

• Subsidising interest (for interest-free credit)

• Commission fees to brokers or lenders

• Staff training and system integration

• Compliance and regulatory costs

Potential Returns:

• Increased sales and average transaction values

• Improved customer loyalty and retention

Risks:

• Non-payment or default by customers

• Cash flow delays (if using in-house credit)

• Reputational risk if finance is mis-sold or poorly explained

• Regulatory penalties for non-compliance

Careful planning and the right partnership can mitigate most risks, but it’s vital to weigh the costs against potential gains.

Eligibility, Requirements, and Legal Considerations

To offer finance legally in the UK, businesses must:

• Be FCA Authorised: Most credit activities require authorisation unless you partner with a regulated broker.

• Conduct Affordability Checks: Ensuring customers can afford repayments is a regulatory requirement.

• Comply with Consumer Credit Act: This governs contracts, advertising, and customer rights.

• Train Staff: Staff must understand products and compliance obligations.

• Data Protection: Handle customer data in line with GDPR.

Failing to meet these requirements can result in fines or loss of authorisation.

How to Offer Finance: Step-by-Step

1. Assess customer demand for finance options

2. Research and select suitable finance partners

3. Apply for FCA authorisation (if needed)

4. Integrate finance application process into sales journey

5. Train staff on finance products and compliance

6. Promote finance responsibly in marketing materials

7. Monitor and review customer outcomes regularly

8. Stay updated on regulatory changes

Pros, Cons, and Key Considerations

Pros:

• Boosts sales and conversion rates

• Attracts new customer segments

• Strengthens customer loyalty

Cons:

• Compliance and regulatory complexity

• Potential for increased admin workload

• Financial risk if customers default

• Possible negative brand impact if not managed properly

A measured approach, clear communication, and the right partnerships are essential.

Before You Decide: Essential Warnings

• Mis-selling Risks: Misleading customers or failing to explain terms can lead to serious sanctions.

• Hidden Costs: Check for fees, system integration, or ongoing commission charges.

• Reputational Impact: If customers struggle with repayments, your brand could suffer.

• Regulatory Changes: The FCA is tightening BNPL and other finance rules—what’s allowed today may change tomorrow.

• Customer Suitability: Not every customer is suited to finance; responsible lending is key.

Exploring Alternatives

If direct finance isn’t right for your business, consider:

• Layaway Schemes: Customers reserve goods and pay over time before collecting.

• Discounts for Upfront Payment: Incentivise customers to pay in full.

• Partnering with Credit Card Providers: Offer promotions or partnerships with major card companies.

• Gift Cards or Vouchers: An alternative way to encourage larger purchases.

Each option has its own pros and cons; the best choice depends on your business model and customer profile.

Frequently Asked Questions

1. Do I need FCA authorisation to offer finance? If you arrange credit yourself, yes. If you use a regulated broker or lender, authorisation may not be required but check carefully.

2. What information must I give customers? You must provide clear, accurate pre-contract information including repayment amounts, interest rates, and key terms.

3. Who handles customer credit checks? If you partner with a broker or lender, they usually handle checks. If providing in-house credit, you are responsible.

4. What happens if a customer defaults? Responsibility depends on the finance structure; external lenders may absorb risk, but in-house credit means you chase payment.

5. Can I advertise finance products freely? All advertising must comply with FCA rules and the Consumer Credit Act. Check all materials for compliance.

6. How long does it take to set up? Typically, a few weeks if using a broker; several months if seeking FCA authorisation.

7. What training do staff need? Staff should understand the finance products, responsible lending, and compliance requirements relevant to your business.

Your Next Steps

• Assess demand for finance among your customers

• Compare finance providers and broker partners

• Consult with a compliance expert or financial advisor

• If proceeding, plan staff training and marketing carefully

• Monitor your finance offering regularly to ensure compliance and customer satisfaction

Offering finance can transform your business, but requires diligence and commitment.

Disclaimer

This article is for general information only and does not constitute legal or financial advice. Businesses should seek professional guidance before offering finance or entering into any credit agreements.