Payment Plans: Tips for Small Business

Large department stores seem to be able to offer these amazing payment plans.  They're interest free, with no money down, payments stretched out till the end of the world (and I don’t mean December 21^st), and you can return your purchase up to 12 months, even if you used it.  I’ve often wondered how businesses can afford that sort of thing, but the answer is probably obvious: the costs have already been worked into the price of the item, so that all the customers who buy outright cover the expenses of such a plan.

If you’re a tiny business like me, you have to think differently.  A payment plan that goes bust can get very costly, and it can hurt you, your customers, and your suppliers.

Payment plans are risky.  You have to ask yourself why someone wants a payment plan from you in the first place, as opposed to using a credit card.  Maybe the buyer has bad credit, or is too young to have established any.  In that case, you should protect that person by not offering them a payment plan.  Or maybe the buyer is avoiding interest.  That’s understandable, but a small business has no way of qualifying a customer for loans, checking their credit or their financial stability.  

Also, if your prices are low and your customer base small, you can’t distribute the costs of the buyer who drops out of a payment plan over other items.  And if any of your customers are reading this right now (mine are), they might be asking themselves why their price should increase because someone else doesn’t pay.  Good point, right?

But let’s say you insist on having a payment plan anyway, or you feel bad for the customer who can’t afford something they like.  Here’s what you do.

1. You require a non-refundable down-payment of 10-20%.  Call it a restocking fee (I will get to this below).  This forces the buyer be sure they want to commit and it lowers your risk.
2. Clearly define the payment plan.  If it’s too long, the buyer may lose interest or the ability to pay.  Times are tough.  With a shorter payment plan (2 months is good), you get paid faster and the buyer doesn’t have debt hanging over their head.  That's good for both of you.
3. If you are selling an item that has to be made, don’t produce it until it is close to fully paid.  That way you don’t have to bust your personal piggy bank to pay your suppliers or help.
4. Related to that, never ship the item until it is fully paid for.
5. If you’re selling a one of a kind item that you have to set aside for the customer, you may not have enough cash to make new things until that piece is fully paid, shipped, and the customer is sure they won't return it.  If that is the case, you need to have money in your bank before you can offer payment plans.  If you make new items too soon and too fast, you will suffer a personal loss if your buyer can’t pay.  You could end up sitting on lots of expensive inventory, and lack the spare cash to refund the buyer for a return, or pay your suppliers.  So you need to be very clear about your risks.  Make sure any item in your shop is itself fully paid for!  Debt is common in the jewelry industry, but I strongly urge you not to incur it, even if that means your business will grow more slowly. 
6. Finally, limit the amount of payment plans you give out: 5 payment plans of $500 for already made items are a potential $2500 loss for you, and your bank account should at any time be able to cover that amount.  (If you have a restocking fee, you can subtract out that percentage.)

And now you can probably see why I think the restocking fee is necessary.  If you take back a unique and expensive item that you have already reproduced, then you have two.  And it takes longer to sell two items than one. Remember always that you may have stock that you can’t sell.  If you don’t budget carefully, you’ll have a lot of pretty things but no buyers, and there is no fast way to turn the stock into cash, should you end up in financial trouble yourself.

This is my final piece of advice: if you’re not selling food or clothing, if you’re not in health care or education, then what you are selling is not an essential good.  I know you’d like to make money, but if you entice your buyers into a payment plan, or don’t hold them back if they are about to enter a payment plan they can’t really afford, nobody will be happy in the end.