How To Accept Instalment Payments: Guide for UK Businesses

Instalment payments enable customers to purchase items with little or no deposit and then split up the remaining cost into multiple payments over time.

Not only can this be a cheap way to accept card payments, it can help you close more sales and boost your business’ revenue since paying a fee over time can be more appealing to shoppers. Plus, ‘buy now pay later’ providers give you the entire payment upfront, so there’s no disruption to your cash flow.

The process for accepting instalment payments is distinct from the process for accepting credit card payments and may require signing up with an additional payment provider. In this guide, we explain how to accept instalment payments in the UK.

Types of Instalment Payments

There are a few common types of instalment payments you can offer customers.

Buy Now Pay Later

Buy now pay later (BNPL) is an instalment payment option offered through third-party payment providers. Typically, BNPL providers pay your business the entire cost of a customer’s purchase upfront, they then get repaid by your customers over time.

The advantage to this approach is that your business doesn’t take on the risk of a customer defaulting—it’s the BNPL providers who stand to lose money if a customer fails to make payments. You also get paid right away, which is good for your business’ cash flow.

However, merchant fees for BNPL can be much higher than credit card processing fees. Expect to pay a fee of 2% to 8% when a customer makes a purchase using a BNPL payment method.

Instalment Sales

Instalment sales are negotiated directly between your business and a customer. You bill a customer for a purchase in instalments at regular intervals until the purchase is repaid in full.

With instalment sales, you can avoid the high fees of BNPL sales. However, your business assumes the risk that a customer will default on their payments.

Instalment Loans

Instalment loans are similar to instalment sales, but you charge interest on a customer’s outstanding balance. In effect, your business is funding a customer’s purchase much like a bank might provide a loan to fund a purchase.

Instalment loans involve the same financial risk as instalment sales, but your business can potentially make more money from interest. However, instalment loans also increase the total purchase cost for your customers, so they may think twice before engaging with your business.

How To Accept Buy Now Pay Later Instalment Payments

It’s relatively easy to offer BNPL as a payment option for your customers. You just need to sign up with a BNPL provider, and then connect the provider to your point-of-sale or online store.

Most major BNPL providers have user-friendly integrations for popular point-of-sale systems, like Square, Vend, Shopify, Clover, and others.

Similarly, most BNPL providers offer one-click integrations for website builders like Wix, Squarespace, and Shopify. If there’s no integration available for your website platform, BNPL providers typically offer code that you can copy onto your checkout page.
Popular BNPL providers in the UK include:

Klarna
Clearpay
Payl8r
Splitit
PayPal
GoCardless
Laybuy

How To Accept Instalment Sales and Instalment Loan Payments

To accept instalment sales and instalment loan payments, you must have billing tools that support recurring payments. This could include software that enables you to automatically send recurring invoices, such as Quickbooks, Clear Books, or Sage. You could also use a payment provider that supports recurring BACS payments or credit card payments, such as PayPal or Stripe.

To calculate instalment sales, divide the total cost of a customer’s purchase by the number of instalments they’ll make. For example, say a customer makes a £1,000 purchase and will pay in six monthly instalments. They should pay £166.67 (£1,000 divided by six) each month.

For instalment loans, use an interest calculator to determine the total interest on the loan and add it to the total purchase price. Then calculate payments following the same method as for instalment sales.

For example, say a customer makes a £1,000 purchase with an interest rate of 4% p.a. and will pay in six monthly instalments. The total interest is £19.80, so the total they will need to pay is £1,019.80. That equates to six monthly payments of £169.97 each (£1,019.80 divided by six).

Why Should You Accept Instalment Payments?

Accepting instalment payments has several significant benefits for your business.

Better Sales Conversion

Giving customers the ability to pay for large purchases in instalments reduces the barriers they face when making a purchase. On average, businesses in the US offering BNPL saw a 13% increase in their customer conversion rate compared to businesses without BNPL.

Larger Sales

Offering instalment payments can also encourage customers to make larger purchases. One analysis found that offering BNPL increases customers’ average purchase by 30% to 50%.

Attract More Customers

Many BNPL providers have online directories of businesses they work with. Customers can potentially find your business through these directories, helping you attract a wider audience.

BNPL Has No Impact on Cash Flow

BNPL providers pay your business upfront for customers’ purchases. So, there’s no disruption to your cash flow when customers make purchases using a BNPL payment method.

Drawbacks of Accepting Instalment Payments

While accepting instalment payments can be advantageous, there are some drawbacks to keep in mind.

High Fees for BNPL

BNPL providers typically charge a fee between 2% and 8% of your sale. That’s much higher than the typical fee of 1.5% to 3.5% for processing credit card payments.

Risk of Default

If you offer instalment sales or instalment loans, your business could lose money if your customer defaults on payments. It’s important to carefully evaluate a customer’s creditworthiness before offering instalment payments directly.

Instalment Sales Can Impact Cash Flow

When you offer instalment sales, your business is paid for a sale over time rather than all at once. This reduction in cash flow can make it more difficult to purchase new inventory to replace what you sold.

Verdict

Accepting instalment payments can help your business increase sales, especially for high-value products and services.

The easiest and least risky way to accept instalment payments is to use a BNPL provider. These providers pay you upfront for customers’ purchases, so you don’t have to worry about late or defaulted payments.

However, be aware that BNPL providers charge relatively high fees, so you may prefer to offer instalment payments directly to customers. Check out our guide to the best UK merchant accounts to start offering instalment sales or instalment loans.

FAQs

How do I create a payment plan agreement for instalment sales?

Your payment plan agreement for instalment sales should include the total amount of a customer’s purchase, the number of instalment payments they’ll make, and the schedule and the amount of each payment. It should also lay out additional terms such as late fees. Both you and your customer should sign the payment plan agreement.

What happens if a customer falls behind on BNPL payments?

If you use a BNPL provider and your customer falls behind on their payments, there’s no cost to your business. The BNPL provider assumes all risks of customers defaulting and will not ask for money back or charge additional fees.

What payment providers offer buy now pay later?

Popular buy now pay later (BNPL) providers in the UK include Klarna, Clearpay, Payl8r, Splitit, PayPal, GoCardless, and Laybuy. Fees for BNPL providers vary but expect to pay 2% to 8% of your sale in fees.