What Is In-House Financing?

By: Dylan Jacobson
June 8, 2022

Businesses selling high-value items, such as car dealerships and electronics stores, can partner with lenders to provide financing to customers. Or they can skip the traditional financing and offer in-house loans directly to their buyers. 

Keeping finance in-house can help you increase revenue and improve the customer experience, but setting up loan processes and managing accounts can be challenging. Instead of focusing on selling your products, you risk spending too much time doing the work normally handled by financial institutions. 

When you take this route, your employees will have to track payments, manage customer information, and chase late or overdue payments. You also could lose money when your customers can’t repay their loans. The problem is that without proper processes, in-house financing can hurt your business rather than help it. 

The solution lies in understanding what in-house financing is and leveraging technology and automation to streamline processes, reduce errors, and save time. 

In this article, you’ll learn how in-house financing works, how it’s different from bank financing, and what lending platforms you can use to make the entire process more efficient. 

What Does In-House Financing Mean? 

In-house financing is financing that businesses offer directly to buyers to make it easier for them to afford large purchases such as a car, furniture, or jewelry. 

Instead of the customer taking out bank financing or using a high-interest credit card to purchase a valuable item, they get a loan from the seller. 

In-house financing eliminates the need for a business to partner with a financial institution or third-party lender and cuts down the red tape required for a customer to make a purchase. You act as a seller of your products or services and as a lender that finances the purchase of those products. 

That means it’s your business’s finance department that reviews applications from customers, checks their credit history, determines interest rates, and approves or rejects applicants. 

It’s extremely common for car dealerships to offer in-house financing. With financing as an extra service, a car dealership gives buyers the flexibility to purchase a new or used car without having to take out an auto loan from a bank. 

There are also many consumer industries that use in-house financing. From clothing to dental services, if your business provides expensive products or services, you can give your customers more flexibility with in-house financing options. 

How Does In-House Financing Work? 

With this financing method, there’s no third-party lender. So, your company will need employees to staff a finance department. This department will handle this service for customers. 

If your business is thinking about offering in-house financing, here are the steps your finance department will need to take care of: 

  1. Outline the products and services offered under in-house financing. Car dealerships will provide dealer financing for a new car or a used vehicle. 
  2. Create a plan that establishes the interest rates you will charge, loan criteria, and how you will deal with applicants with bad credit, and decide what loan terms to use. Companies providing in-house financing usually charge higher interest rates than banks because they take on more risk. 
  3. Develop application procedures, including forms that customers have to fill out and documents they have to submit to verify their income and identity. 
  4. Inform your customers or potential borrowers about your in-house finance plan. 
  5. Receive applications from customers and verify their information, such as their income, residency, and down payment amount. 
  6. Review applications using your established lending criteria. 
  7. Approve or reject loans so customers can purchase the items they want from your company. For example, a used car dealership will provide an auto loan, allowing a customer to purchase the vehicle they want without having to visit their bank and apply for a personal loan. 
  8. Manage payments from customers on a monthly basis and set up a system for communicating with borrowers about late or missed payments. 

The Pros and Cons of Providing In-House Financing 

In-house financing allows businesses to gain more control over their customer base and open new avenues for profit. But, this type of financing also brings a lot of risk to the business, which can affect the main line of operations. 

To help you better understand whether in-house financing is the right choice for you, let’s dive into the pros and cons. 

Pros of In-House Financing 

Businesses providing in-house financing, whether for a car loan, an equipment loan, or retail products, have the opportunity to gain a myriad of benefits. 

  1. Cut out a third-party lender. With fewer stakeholders in the mix, in-house financing is a quicker process, which can improve the customer experience. While a bank loan could take days or weeks to get approved, companies with in-house financing provide quick approval and shorter sales cycles. 
  2. Increase in sales. Because your sales cycle is shorter, you can sell products or services faster than if your customers had to borrow money from a bank to pay for them. 
  3. Diversified revenue. In addition to selling your products and services with a shorter sales cycle, you will also diversify your revenue. Not only will you profit from the sale, but you’ll also bring in a steady stream of interest revenue. 

Cons of In-House Financing 

While companies offering in-house financing may gain increased sales and revenue, there are also a few downsides to giving customers a loan to purchase your products. 

  1. Higher risk. When banks provide financing to customers, they take on the risk burden. If the customer defaults on a loan, the bank could lose money. But when your business provides loans, you take on the risk if customers default. 
  2. Resource-intensive process. Setting up a lending department on top of your main operations can be costly. Many businesses set out to increase revenue by providing loans to their customers, but if the process is not managed well, you may spend more money than you make trying to manage the loans. 
  3. Reporting to financial institutions. Businesses with in-house financing opportunities have to report the status of every loan to credit bureaus and credit unions. This is one more obligation your employees have to take care of. 

Streamlining the In-House Financing Process 

Businesses that want to provide in-house financing to their customers can benefit from technology that helps them manage the entire process. 

Platforms such as loan management systems have features that enable you to save time and resources by automating many of the tasks of in-house financing. Here are the benefits of setting up a loan management system for your business.

#1: Access Customer Information Directly

Just like traditional lenders, businesses offering in-house financing will use multiple tools to store customer information, such as contact information, credit history, purchase history, and payment history. Staff will then have difficulty finding the data and using it to service loans or even cross-sell without the right technology. 

A loan management system allows you to centralize data in one place, so you can store documents and vital information in a secure location. Your staff will save time trying to pull data and can better communicate with customers about their needs. 

#2: Efficient Application and Approval Processes 

When customers want to get a loan from you, whether a car loan or an electronics loan, they have to fill out application forms. Many lenders and businesses with in-house financing use a manual application and approval process, sometimes even having customers fill out forms on paper. 

But this is time-consuming for your staff and your customers.

Loan management systems allow you to create custom forms to collect customer information immediately instead of having them come back with additional documents or calling them to ask for more information. You can also give customers the option to apply for financing digitally. 

Even better, loan software allows your business to perform a credit check and quickly see if an applicant meets the requirements to get in-house financing, so you can let them know if they’re approved right away. 

#3: Quick Loan Calculations

Once you review your customer’s application and verify their information, it’s time to calculate the payment schedule. 

Putting the burden on your staff to conduct complex calculations and create amortization schedules can create inefficiencies. Relying on manual calculations also makes your financing process prone to error. 

Instead of spending time training or hiring staff for loan calculations, you can leverage a loan management system that has built-in calculation features. The platform allows you to conduct even the most complex calculations automatically, giving your staff more time to focus on selling. 

#4: Receive Automatic Payments 

After approving in-house financing customers, one of the biggest challenges is making sure every borrower makes their monthly payments. 

A lot of work goes into ensuring that you’re receiving the right amount of money and communicating with borrowers who may be overdue. It’s a time-consuming process that can quickly get chaotic when your customer base increases. 

With a loan management system, you can give your customers the option to set up automatic payments. An auto pay feature allows borrowers to schedule automatic payments that will transfer money to your account every month, so you never have to chase after a payment.

#5: Enhance Customer Communication 

Your in-house financing customers expect regular communication about their loans. They might contact customer support to check their loan balance or find out when their payment is due. They might also appreciate reminders letting them know when they need to make a payment. 

But your sales and customer success teams only have so much time to devote to maintaining existing relationships and creating new ones. To make customer communication easier and strengthen relationships, you can use the scheduled messaging features from a loan management system, such as LoanPro. 

Your platform should be equipped to help you schedule automatic emails, SMS messages, or notifications with custom text so your clients are updated on the newest offerings and understand their current financing status. 

#6: Keep Track of Performance 

It’s crucial to track every loan when you start offering in-house financing options to customers. You need to understand the performance of your finance department and generate reports to gain insight into what is going well and what needs improvement. 

But creating manual reports and tracking key performance indicators (KPIs) requires time and effort. By the time you create one report, the numbers have changed, and your insights might already be obsolete. 

A loan management system automatically generates any report you need, so you can receive relevant data and track how your in-house financing business is performing over time.

Conclusion

In-house financing is an excellent way for businesses to improve their sales, diversify revenue, and offer additional services to their customers. But managing the process and tracking every borrower is a complex task that requires the right process and the right technology. 

LoanPro can help you automate your in-house financing and simplify your processes. It provides a centralized location to store data and manage documents, set custom forms and receive customer information, manage payments, and generate reports. 

LoanPro lets you streamline in-house financing and better serve your customers. Learn more about LoanPro’s loan management software today!