We all know that financing is the act of borrowing money to make a purchase. But what are the benefits? When consumers purchase an item with a loan, they can buy it now instead of waiting for their next paycheck. The cost of the loan may even be less than the cost of paying interest on credit card purchases. Then there are merchants, who may benefit from financing because consumers are more likely to buy their products when they have access to funds that can be used right away through financing options.
Before coming to the point of what are the prime benefits of financing, let us first understand what it means by financing.
What is Financing?
Financing is a process of providing funds for different business purposes like purchasing and investment. Differently, you can say that financing is a way of leveraging the Time Value Of Money. People or businesses who have a surplus amount of money can take advantage of financing by putting it into work through lending or investing that eventually generates returns.
There are mainly two types of financing. Debt financing and equity financing. We will discuss it later. First, we need to know what are the advantages of financing for Merchants and Consumers.
Advantages of Financing:
1. Boost Sales:
Both merchants and consumers can take the benefits of consumer financing. Customer finance is a payment plan option that allows the consumers to spread the cost of the product or service they purchased over time. It is when a merchant makes a consumer purchase more things from his store and allows the consumer to pay the cost in installment over time.
Customer financing increases the sales of the merchant by convincing the customer to buy more and helps in business growth. Since it allows the consumers to pay the price according to their convenience in monthly installments, their purchasing power increases and can help them buy some expensive products they desire.
Another benefit of customer financing is it helps to build customer-oriented businesses that help to build trustworthy relationships between consumers and merchants.
2. Increases Average Order Value:
Average order value is the amount of money a consumer spends each time he interacts with the merchant. That is a great way to calculate the growth of the business by simply dividing total revenue by total customers.
Financing can help you increase the average order value as it allows the consumer to pay in regular monthly installments throughout the year for the product they purchase right now. It helps customers buy more and helps in increasing average order value.
3. Improve Cash Flow:
Cash flow defines liquidity or how much money is coming in or going out of the business. It is the money the company receives from customers and investors and gives out by the way of payment to the creditors. Positive cash flow is really important to run a company which means more money is coming into the business than it paid out. And financing is a way to improve cash flow inside the business. Companies can issue debt and equity financing to improve their positive inflows.
A business can also increase its cash flow by using a third-party lender. A third-party lender company can approve your customers’ loans and pay you in advance. Which will keep your business running and customers can repay the amount at their convenience. This way all three parties are satisfied.
4. Attract New Customers:
When merchants try to increase their customers to boost their sales, they try consumer financing. To make new loyal customers they have to make their products look affordable even though they are not. This financing trick is what most businesses use, where they break down large purchasing amounts into smaller affordable amounts. This helps most of the consumers to make large purchases like home interiors or jewelry. Merchants provide different offers also to attract new customers by financing like above certain they will get extra discount.
5. Helps Small Merchants Grow:
We must know merchants are also consumers. They consume on a higher level so that they can provide products and services to their customers. Whether they are approaching a busy session or just want to scale up the business, in both cases they require inventories and products in bulk. Without these small businesses are missing out on large profits. Also, sudden cash needs can arise at any time.
From buying machinery to hiring people, everything requires large funds and financing can help small businesses get through. In that way, merchants can borrow a large amount of money from lenders and can spend it wisely depending on their needs and can repay it in installments. Thus you can grow your business and also don’t need to worry much about the funds.
Thus financing can help both the consumers and the customers in their needs.
Now Let’s Discuss the Types of Financing:
Mainly there are only two types of financing.
Most people are familiar with debt that is one type of financing. Debt financing occurs when companies borrow money from banks in the form of bonds or loans to raise money and promise to repay the loan with interest in installments. It is also known as financial leverage.
- The lending authority has no control over the borrowing company.
- The amount of interest one pays for debt financing can be tax-deductible.
Equity financing is a process where the company raises capital by selling its shares to other entities. From time to time investors can show their interest in how the company operates. In difficult situations, they possess the authority to run the company. In this way, an investor gives his money to the company and can claim his percentage from the company’s future earnings.
- The biggest advantage of equity financing is that your company doesn’t need to pay back the money to the lenders or investors if it faces bankruptcy.
- You don’t have to make monthly payments. So you will be able to save extra cash for future requirements.
Hope the above information helps you figure out how financing can help merchants and consumers.