Let’s talk about different types of consumer financing. Captive financing means a business can sell their product or service using their parent company’s, sister company’s, or a subsidiary’s financing services. Captive financing differs from in-house financing when a business such as an orthodontist office or a tax relief company has staff to handle credit applications and contracts, monthly billing, and collections for consumers’ late or non-payment. Captive financing also differs from outsourced consumer financing, when a business partners with a separate bank or finance company, such as Wells Fargo or Affirm. In today’s competitive marketplace, offering financing is essential to serve and appeal to a wider client base and for easier and faster customer acquisition.
No matter what product or service you sell, understanding captive financing and its benefits empowers you to confidently adopt this tool as part of your overarching business strategy. Read on as the United Consumer Financial Services team explores the ins and outs of captive financing and what it can do for your organization.
The Essential Nature of Consumer Financing
Consumer financing; Buy Now, Pay Later; low monthly payments; flexible repayment plans: this variety of purchase option terms allows consumers to choose and purchase high-ticket items they want on their timelines. Shoppers don’t merely want financing options; they demand them.
Shoppers across markets and in every demographic expect businesses – selling home services such as home improvements, whole-home water filtration, and new HVAC units, and retailers selling products such as furniture, engagement rings/jewelry, lawn tractors, and electric bicycles – to offer financing.
Credit cards have lost their appeal, especially among younger shoppers who want to replace the pain points of credit cards: high APR, unclear payment schedules, limited credit ceilings, varying repayment amounts, compounded interest, or a decade of payments when just minimum payments are made.
Two-thirds of consumers want more credit but don’t want to add credit cards to their wallets. Purpose-driven financing ticks all the boxes for consumers without the cons of credit cards. Captive financing may mean you can access more favorable consumer financing programs for your business and customers.
Understanding Captive Financing
Captive consumer finance signals that the financing company is part of the same organizational ownership as the seller of products or services, be it a manufacturer, distributor, or service company. These types of affiliates exist to provide financing options to the parent or sister company’s target consumers, increasing purchase power and cart value for big-ticket items.
Captive financing companies employ a sales-driven, customer-centric approach, being truly interested in facilitating the sale of their products to serve more consumers. Non-captive financing is credit-driven, meaning sellers have a smaller customer pool; typically, only consumers with high or very good credit can use non-captive financing solutions.
Below we explore the differentiating factors of captive finance.
The Benefits of Captive Financing
Captive financing makes sales, payment, and compensation simple. Regardless of your product, your audience wants financing options. Captive financing is typically the easiest route for parent companies to provide financing while maximizing their returns. Below are a few benefits of captive financing that can support your organization today and into the future.
- Captive Financing Scales with Business Growth
Your organization will grow, evolve, and adapt to market changes. Your standards and policies will shift, and day-to-day operations may change.
As growth strategies are built out, scalability and special programs are crucial. With a captive financing company alongside your selling organization, you’ll have financing options that can grow and flex with you to meet your and your clientele’s needs to help approve more customers. Suppose costs of goods or manufacturing costs have increased. In that case, a captive financing partner who offers low monthly payments can help sell products, breaking that large ticket item price into monthly payments.
A captive financing partner can help you eliminate the stress and hassle of configuring new programs to meet consumer demand and make purchases more attractive with lower payment options. Captive financing scales with your organization, operating with an aligned culture and values to deliver an exceptional customer experience.
- Provide On-the-Spot Financing
Consumers don’t want to wait. Some consumers expect to take out a conventional bank loan to make a large purchase, which can delay a purchase. If they must wait, the likelihood of postponing or abandoning their purchase increases exponentially.
Captive financing positions your sales teams to offer accessible, trustworthy financing options at the point of purchase –– and even before. When consumers know they’ve got low monthly payment options, they enter the conversation with greater confidence and enthusiasm, which can lead to increased sales and revenue.
With captive financing, consumers can purchase goods and services quickly and easily from the seller because the parent or sister company’s financing options and processes are incorporated into the sales cycle. Captive companies more readily approve loans because of their interest in lending money for their own or sister company’s products.
Offer on-the-spot financing to capitalize on the emotion of the shopping experience. Simple application, prompt notice of approval, and clear, consistent terms: captive financing streamlines the sale and increases revenue.
- Drive Sales and Grow Profits
Shoppers from every demographic desire financing, including younger shoppers. Forbes reports that 42 percent of Gen Z and 69 percent of Millennial shoppers are more likely to purchase when installment loans are a payment option.
Adopting the captive financing model empowers dealers or sellers to drive sales and profit growth regardless of the products or services they provide, including:
- Water treatment systems
- Jewelry retailers
- HVAC suppliers
- Medical equipment companies
- Musical instrument retailers
Flexible payment options translate to increased affordability for your shoppers. Simply put, installment financing drives revenue. Through captive financing, businesses
- Expand customer bases using more streamlined sales processes
- Increase closing ratios with more approvals
- Increase sales dollars via new sales and with add-on products or services
Dealers and merchants aren’t required to use their affiliate captive financing options. Still, when they do, they’re more likely to increase sales, revenue, and profits, which results in sustainable business growth.
- Reduce Risk Exposure
When captive financing is done well, the parent enterprise and the selling organization reap the rewards. A captive financing company can assume some risk by financing more consumers to move products. The captive financing company can be a safety net for its selling organization partner. If a customer defaults on a loan, the captive can share the loss with the selling organization.
In addition to creating pathways to increase profits, captive financing can help reduce risk exposure, allowing you to realize the benefits of higher yields, lower sales volatility, and greater market share.
- Joint Messaging and Selling
Selling and financing from sister companies has additional benefits. Two independent organizations can jointly implement a singular strategy, marketing, and advertising campaigns to target a wider audience. Product advertising, association and trade show initiatives, social media posts, and more can be joint ventures with two companies having a common goal.
This initiative can position the two organizations as one to increase customer engagement and position these two companies as a strong industry leader in both selling and financing.
- Stronger Selling During Economic Uncertainty
During an economic climate downturn, a top consumer purchase objection to big-ticket items is “too high of a price.” This statement can be more easily countered when financing – especially captive financing. A captive financing company can possibly work with their selling partner to offer special programs and adjust terms and APR to more easily meet consumer needs to put a lower monthly payment dollar amount in place.
A captive financing company may be able to take more risk than a bank or other finance company because they know the product and industry and have a vested interest in selling more of the product or service.
Also, proving the high value of your product during economic uncertainty is more challenging when consumers are stricter with their household budgets. Your sales team must be prepared to prove the worth of your product or service and overcome purchase hesitations. Sellers must have a library of consumer objection comebacks. United Consumer Financial Services provides a list of objections and responses, all to provide the customer with a monthly payment that fits their budget.
Support and Protect Your Organization with Captive Financing
Captive financing is mutually beneficial for the parent company and its customers. With clear policies and terms, cultural alignment, and the service and support consumers need captive financing is the ideal solution for flexible payment options in today’s market.
What if you don’t have a parent company, sister company, or subsidiary that can offer captive financing? The next best option is outsourcing your financing needs to a company with flexible financing options, longevity in the marketplace, high integrity, and strong fiscal responsibility. That company is United Consumer Financial Services!
Enjoy greater control over your financing and deliver the solutions your customers expect. Reach out today to explore outsourced financing if captive financing isn’t possible. United Consumer Financial Services is backed by 44 years of experience serving sellers in many industries. We have financing solutions businesses need to increase sales and serve more consumers.