December 10, 2023

Should Furniture Retailers Consider Financing Their Own Sales?

Retailers are continuously looking for opportunities to improve their bottom line.  This issue seems to be at the top of virtually every convention, buying group, association, furniture market, or performance group gathering.  Just look at the topics discussed at any of these events; almost all focus on either increasing sales or margins, reducing expenses, or drawing in more customers.  Since retailers seem willing to consider any new ideas that can generate additional profit, why don’t more retailers consider financing their own sales?  Join us as we uncover the untapped potential that retailers should consider financing their own sales and how it can pave the way to a more prosperous future.

For the past several years, the number of furniture retailers financing their sales has been shrinking, while the number of third-party finance companies taking on financing for furniture retailers has been significantly increasing.  There are now dozens of finance companies that furniture stores can use to finance their customers’ purchases.  The question we should be asking ourselves is, why?  The answer is clear; finance companies are fighting for your business because financing can be very profitable!  

While many retailers opt to work with third-party financing companies, banks, or lease-to-own companies, there are many compelling reasons why retailers should consider financing their own sales or at least a portion of their sales. 

First and foremost, offering in-house financing can give a retailer a significant competitive advantage. By providing customers with flexible payment options and personalized financing plans, credit retailers can differentiate themselves from their competitors and build strong relationships with their customers.  This in turn leads to increased customer loyalty, repeat business, and positive word-of-mouth recommendations.  I was the CEO of a furniture company that specialized in financing their customers’ purchases in my former profession; over 70% of our sales came from repeat customers.  By offering in-house financing to help customers meet their financial needs, retailers can build strong bonds and drive repeat business. 

Moreover, in-house sales financing can help retailers better manage their cash flow.  There are indeed initial investments needed to get started.  However, as receivables grow, retailers create a steady stream of cash that flows back to the company every month…with a profit margin (finance charges) included.  By financing their own sales, retailers can create a monthly income stream which is helpful in maintaining control over cash flow and adds profit.  This income stream comes in handy, especially when there is a slowdown in sales and the retailer continues receiving monthly payments generated from previous sales.

Software enhancements today have made it far easier than it used to be for retailers to offer in-house financing.  Retailers must use finance software that is seamlessly integrated into their retail software in areas such as point-of-sale, cashiering, sales management, inventory, marketing, distribution, etc. The integration allows retailers to create efficient processes that link financing to the rest of their business.

On the marketing side, credit retailers gather incredibly useful customer information by capturing credit report information and other customer documentation.  The information is originally gathered to allow for better risk assessment when extending credit; however, the information can also be used for targeted marketing to the retailer’s customers.  For companies using third-party financing, the only company benefiting from the collection of this potential treasure trove of marketing information is the third-party finance company itself.  Imagine if you could run marketing reports at any time to see where customers are in their payment cycles.  Customers down to their last few payments might be ripe to buy again.  Isn’t that what we are all looking for in our marketing, to communicate with our customers when they are ready to buy?

Furthermore, offering in-house financing can help retailers sell more high-ticket items. Many customers may not have the cash to purchase expensive products outright but may be willing to finance their purchases over time.  By offering financing options, retailers can open up a new market for high-ticket items and increase their overall average sales and sales revenue.

Finally, financing your own sales can be a lucrative source of additional revenue for retailers.  By charging interest on financing plans, retailers generate a steady stream of income which can help offset the costs of offering financing in the first place.  Have you looked at the APR of your credit cards lately?  I just did, and here are a few examples: Macy’s 31.74%, Neiman Marcus 30.24%, and Wayfair 31.99%.  And those APRs do not include ancillary charges such as late fees, credit insurance, or other add-on financial products. 

Most retailers with in-house financing offer installment (closed-end) loans, which differ from revolving loans usually associated with credit cards.  Installment loans are easy for customers to understand, have a fixed monthly payment and a fixed number of months to pay, and each payment pays down a decent portion of the principal.  Revolving loans have a minimum monthly payment and no fixed time to pay off the loan – so if the customer makes the minimum payment each month, a minimal amount of principal is paid, resulting in the loan taking years to pay off.  The rate the retailer is allowed to charge customers will depend on where the retailer is located in the country and the type of loan the retailer is making. 

Of course, there are also potential drawbacks to financing your own sales. Retailers must invest in the infrastructure and resources to manage their financing program, including credit review processes, collections, and customer service.  There is also the risk of defaults and delinquencies, which can hurt a retailer’s bottom line.

However, despite these potential challenges, many retailers have found that financing their own sales can be a smart and profitable business strategy, especially when using software designed to simplify and aid the retailer.  By providing customers with flexible payment options, better-managing cash flow, gaining a deeper understanding of their financial situations, gathering valuable marketing material, selling more high-ticket items, and generating additional revenue, retailers can create a competitive advantage and build stronger relationships with their customers.

In conclusion, retailers should seriously consider financing their own sales. While there are risks and challenges associated with offering in-house financing, the potential benefits could easily outweigh the costs.  By taking control of their financing programs, retailers can increase their sales revenue, create new revenue, build customer loyalty, and create a sustainable and profitable business model.


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