Offering free access to credit at the point of sale (POS) is a powerful business-generating tool for construction companies of all sizes. However, not all companies have the working capital available to offer in-house financing programs. Partnering with a third-party POS financing platform is an attractive solution, but finding a partner with competitive rates and reasonable implementation costs can be a challenge.
What is POS financing?
POS financing essentially refers to a merchant offering its customers financing to help them pay for products or services at the time of sale. This financing can come in the form of credit cards, unsecured loans and lines of credit. POS loans are increasingly popular because of lower rates and developments in expedited underwriting methods.
POS loans are nothing new. Other sectors, such as car dealers and orthodontic clinics have long offered flexible installment loans to customers. The good news is that advances in lending now make it possible for other sectors, such as construction, to offer instant credit decisions.
When done right, POS financing is a win-win for businesses and customers. Here are seven advantages companies can expect from investing in a POS financing platform.
1. Boost sales
Offering POS financing increases the buying power of clients. Drive sales by offering customers instant loan preapprovals at no extra costs. According to a study carried out by Forrester, companies that implemented an online POS financing option saw a 32% increase in sales.
2. Increase order value
POS financing will give clients more time to pay, which will allow them to afford higher-quality products and services. In turn, it will increase overall sales and average order value (AOV).
The Forrester study reported an average increase in order value of 75% for companies that offered POS financing. Improving AOV without narrowing margins could increase profitability substantially. In the case of the companies that participated in the study, the average return on investment was 726% . The ROI can be even higher for companies who find a POS program that doesn’t charge fees to the business.
3. Better customer experience
The goodwill generated by an effective POS program is an often-ignored benefit of investing in financing programs. A well-implemented financing program can improve the purchasing experience and help to develop a long-term relationship with customers. Create customer loyalty and a positive experience by making financing another of the offered services.
4. Improve cash flow
Slow pay is the bane of construction companies. According to a PwC report, construction and engineering is the sector with the worst receivables performance: an average of 76 days. A third-party POS credit application system can shorten the time between providing services and getting paid.
5. Widen the customer base
A streamlined financing program can help remove friction for buyers who struggle to qualify for personal loans or who don’t have the time or inclination to apply for credit. This is particularly problematic in the construction industry where projects and services tend to be big-ticket items. Many customers are priced out of larger projects or higher-quality services, but a POS financing gives them the option to purchase more expensive services and products.
6. Lenders compete for clients’ business
Emerging POS loan platforms turned the tables on lenders by getting them to compete for the business of consumers. Instead of filing multiple forms to find the best deal available, borrowers receive competing loan offers and can transparently compare the rates and fees of each offer at no additional cost.
7. Lower fees
Often, low fees are some of the last factors associated with POS financing. Discount rates, the fee lenders charge for providing preferential rates to customers, are typically 10% of the loan amount. Implementation costs can run into the tens of thousands of dollars and lenders usually charge monthly maintenance fees regardless of how many loans are generated.
In contrast, some POS platform make access to POS free for businesses and customers. Contractors can offer POS financing with 0% discount rates and no implementation costs.
Bottom line
The benefits of offering existing and potential customers a simple and fast financing program are obvious. Companies offering POS financing see an uptick in sales, an increase in average order value and significant gains in their profitability.
The catch is that many POS financing providers charge hefty fees for setting up and managing these programs. POS lenders usually don’t charge additional fees to customers for their convenience. However, business owners get hit with discount fees of 10% to 20% of the loan amount.
Lenders justify these discount rates as a way to offset the cost of providing lower rates to customers. However, the truth is it’s just another commission lenders charge for their services.
The good news is that advances in financial technology services have made it possible for construction companies to offer instant credit decisions to customers at no additional cost. These turnkey financing programs offer all the benefits of an in-house financing credit system without the risk or implementation costs.
