Payment plans allow customers to pay for a product or service over an agreed period of time, as opposed to paying the entire cost upfront. Typically payment plans involve paying in multiple installments (usually one installment per month or every three months). Other payment plans involve paying a small deposit upfront and then the rest at a later date (often described as ‘buy now, pay later’ or ‘BNPL’ plans).

There are benefits to offering a payment plan to customers, but also drawbacks. It’s important to understand the pros and cons before you decide to set up a payment plan. There are a number of payment networks that can provide you with these sorts of payment plans, and it’s crucial to understand the best one for you. This post delves more into those pros and cons, as well as outlying a few ways in which you can reduce the potential risks of a payment plan.

Payment Plans for Businesses

The pros

• Expands your audience: Offering a payment plan allows you to expand your audience to target customers with a lower upfront budget as well as customers who may not have a credit card.

• Encourages more sales: Greater upfront affordability means more sales. And these customers will leave reviews and provide recommendations, leading to more potential sales. This is by far the biggest benefit of a payment plan.

• Could encourage a more regular income: If you only make a handful of sales per year, that could mean having to live off a few big lump payments and having to potentially go months without any income. Payment plans encourage a more regular income so that you’re less likely to have months with no money coming in.

The cons

• Risk of customers not paying back: You could lose money if customers stop paying instalments. You can take these customers to court, but this will cost you money.

• More time spent per customer: Setting up payment plans and monitoring them to make sure they keep up with payments means that you have to spend more time managing each customer. That said, lower upfront costs could mean less time pitching to each customer.

• Longer ROI per sale: It will be longer before you’re paid back the full value of the product/service. This means having to wait longer to make a return on each sale. With long-term payment plans, a lot of patience is likely to be required.

How to make a payment plan work

There are a few things that you can do to reduce the drawbacks of a payment plan so that you can make the most of the benefits…

Make sure instalments are profitable and reasonable

You need to be making enough money each month to cover monthly expenses. If payments are spread out over a long period into lots of small monthly payments, you may not make enough each month to cover expenses unless you’re taking on lots of customers. At the same time, you don’t want instalments to be so high that they are not affordable for your customers. This involves finding a middle ground.

Track your accounts receivable

Tracking your accounts receivable is important for making sure that customers are paying you back on time and for understanding the total that you are owed. It’s worth educating yourself in this area of accounting by looking into things like what is a good accounts receivable turnover ratio and what are the days sales outstanding. Knowing how to act upon this information is also important – you need to know when to chase up individual customers who are falling behind and when to change your instalment plan offers for new customers to keep them profitable.

Credit check customers

Credit checks may be worth carrying out on new customers to understand how likely they are to pay back their instalments on time. You can then avoid taking on high risk customers and reduce losses. There are credit check services that you can use to carry out these credit checks. Such credit checks can be carried out in a matter of minutes.

Outsource a payment plan provider

There are companies that can handle the whole payment plan process for you – including carrying out credit checks and chasing up late payments. This can save you from having to keep track of clients. You also won’t have to spend as much time educating yourself on how to track your accounts receivable as much of it can be clearly outlined for you. That said, you will have to pay a fee for this service. This fee needs to be low enough that you are still able to make a profit with your instalment schemes.