Many businesses reap the benefits of providing in-house financing to their customers. Retail establishments maximize profits and stabilize monthly income through receipt of regular payments. Extending personal credit also helps grow a loyal customer base.

It is not uncommon for car dealerships, repair shops and other local companies to provide financing options. This is also a smart choice to provide when credit cards are not an option for payment. However, there are also risks involved for businesses that extend credit.

Avoiding losses

If a customer does not make regular payments per the terms of the loan, the business owner takes a loss. A loan agreement has to include provisions for the lender to recover losses due to non-payment.

Making contracts

There are proactive measures to minimize the risks of in-house financing. Provide buyers with a written contract of their rights and obligations. The language within the contract should address:

  • Specific loan terms, including the start and stop dates and monthly payment details
  • Explanation of how early or late payments affect the loan payment
  • Details of services and/or products provided
  • Acknowledgment of credit reporting based on the Fair Credit Reporting Act
  • Provision for late or missed payments
  • Repossession of products when applicable
  • Options to recover unpaid loans balances
  • The recovery of legal fees, if necessary

The consumer must complete a loan application to begin the process. Always run a credit check with a reputable credit reporting agency before approving a loan. When finalizing an in-house loan, go over each line item and give the consumer a chance to ask questions.

Including specifics

Extending credit leaves the door open for a consumer to return. If the loan is for a high-ticket item, such as an automobile, give warranty specifics. Ensure the consumer understands any special conditions under which items receive coverage. For example, if a vehicle’s transmission has no coverage under the engine warranty, state it. Include special provisions in writing within the contract.

Make sure consumers understand the terms of their loan before signing it. The end result can be a successful business transaction that is worth a well-planned risk.