In-House Financing

In-house financing - it is a type of financing provided by a company to its consumers. It is based on financing customer purchases through the seller's internal cash flow. In the model approach, a person who does not have sufficient financial resources takes a so-called credit directly from the seller. The latter, treating it on preferential terms, together with the latter, establishes a debt repayment plan with possible interest or commissions. In order to carry out these activities, retailers must have a well-developed loan department or a third party to handle the services in question. The model described above is the most common in the automotive industry, due to the fact that it allows sellers to close much more sales processes than when only cash is accepted.

In-house financing as a relationship building device

It often happens that banks granting consumer credit impose high costs of securing credit. This is due, among other things, to the fact that the margins achieved on transactions are not always as high as if the banks wanted (or are limited by law). Therefore, in order to finance the object of his desire, the consumer pays a sum significantly higher than the value of the car.

Taking into account the above fact, entrepreneurs meet consumers' needs by offering much lower interest rate loans, provided exclusively by this entrepreneur. Research shows that this has a positive impact on consumer relations with a given brand, in particular that it motivates consumers to return to the trader who offered credit on much more preferential terms when purchasing complementary goods.

Online methods of in-house financing

With the progressing technological development, it has become more and more popular to offer credits online. In order to speed up the sales process, companies made it possible for their customers to apply for credit via a website. In this case, among other things, they are obliged to provide information:

• Property status
• Civil status
• Length and type of employment and type of speech on the basis of which they are employed
• The requested value and own contribution and
• An object in connection with which they wish to obtain a loan.

In addition, a peer-to-peer solution that assumes that the lending business would not connect through any external banking systems but through a 256-bit bit encrypted bitcoin network that can be used to make transactions is now also becoming popular. It would be simple in principle - the consumer orders the granting of a credit. Then, after analysing its credit history and its ability to incur further financial obligations, the entrepreneur will decide whether or not to grant it a particular consumer credit. If the contract is awarded, the trader indicates that the consumer is trusted and that the contract can be transferred to the consumer's account. Only when the consumer confirms the receipt of the item (e. g. scans the item when it is handed over), does the contract turn into a liability on the part of the consumer.

Examples of In-House Financing

• Automotive Industry: Many car dealerships offer in-house financing to customers who may not have the financial resources to purchase a vehicle outright. Customers can take out a loan from the auto dealership, which is then repaid with monthly payments at a predetermined interest rate. This type of financing is especially helpful for those with bad credit, as it can help them get into a car more quickly than waiting for approval from a financial institution.
• Home Appliance Stores: Many stores that sell home appliances will offer in-house financing to customers who cannot afford to purchase the items outright. The store will provide a loan to the customer, which will be repaid in monthly installments. This type of financing is beneficial for customers who need the items right away and do not have the funds to purchase them up front.
• Furniture Stores: In-house financing is also common in furniture stores, as customers often need furniture right away and do not have the funds to purchase it all at once. Furniture stores will provide financing in the form of a loan, which will be repaid in monthly payments. This type of financing is beneficial for those who need furniture quickly and do not have the financial resources to purchase it all at once.

Advantages of In-House Financing

One of the main advantages of in-house financing is that it allows customers to purchase items or services without having the full amount of money upfront. Here are some of the other advantages of in-house financing:

• Increased sales: By offering customers the option to make installment payments, businesses can increase their sales volume.
• Greater customer satisfaction: In-house financing allows customers to purchase more expensive items that they may not have been able to buy otherwise. This can lead to higher customer satisfaction and loyalty.
• Reduced risk: By providing in-house financing, businesses can reduce their risk of not getting paid, since they are more likely to receive payments on time.
• Improved creditworthiness: By offering in-house financing, businesses can improve their creditworthiness, since they are more likely to be able to pay their creditors on time.
• Lower costs: In-house financing can save money for businesses, since they don't have to pay third-party lenders for the services.

Limitations of In-House Financing

In-house financing has several limitations that should be noted:

• The lack of access to external capital can limit the amount of credit available to customers. This can cause a decrease in sales and a decrease in revenue if not managed correctly.
• The cost of financing can be higher than other sources, making it less attractive to customers.
• In-house financing may not be suitable for customers with poor credit ratings or those who have difficulty making payments.
• It can be difficult to manage the loan process and keep accurate records of payments.
• It can be difficult to monitor the customer's payment history in order to assess their creditworthiness.
• It may not be possible to offer a variety of loan products and repayment options.
• It is difficult to know if the customer is taking on more debt than they can realistically afford to repay.

Other approaches related to In-House Financing

• Rent-to-own financing - This approach involves a customer signing a rental contract, with an option to eventually purchase the item. This type of financing allows customers to pay off a purchase in installments over time, while still having the option to return the item if they cannot make the payments.
• Mortgage financing - This type of financing is most commonly used in the real estate market, where a customer takes out a loan to purchase a property. In this case, a bank or other lender provides the financial resources, and the customer agrees to make regular payments over a certain period of time.
• Lease financing - This option allows customers to rent an item for a set period of time and then return it or choose to purchase it at the end of the lease term. This option is popular for large purchases, such as cars or large appliances, and allows customers to get the item they need without having to pay the full cost upfront.

In summary, in-house financing is one of the various financing options available, which allow customers to purchase items with flexible payment plans. Other approaches to financing include rent-to-own financing, mortgage financing, and lease financing. Each of these options allows customers to make payments over time, with the option to return or purchase the item at the end of the payment period.

Footnotes

In-House Financing — recommended articles

Lombard loan — Cash Transaction — Trade receivables — Customer deposits — Staged payments — Credit Facility — Advance funding — Packing credit — Evergreen Loan

References

• Demoulin N. T. M., Djelassi S. (2013), Customer responses to waits for online banking service deliver, International Journal of Retail & Distribution Management, nr 6, p. 442-460
• Jahanshahi A. A., Gashti M. A. H., Mirdamadi S.A., Nawaser K., Khaksar S. M. S. (2011), Study the Effects of Customer Service and Product Quality on Customer Satisfaction and Loyalty, International Journal of Humanities and Social Science, nr 7, p. 256-259
• Omarini A. E. (2018), Peer-to-Peer Lending: Business Model Analysis and the Platform Dilemma, International Journal of Finance, Economics and Trade (IJFET), p. 31-41.

Author: Klaudia Urbańska