Installment Billing for Flexible Customer Payments

Not all customers are capable of paying huge upfront payments in one go. Dividing a heavy payment in smaller, more manageable parts is preferred. And now it has been made easier than ever by advanced billing systems.

Installment billing allows businesses to satisfy their budget-conscious customers, while also ensuring a consistent revenue stream. This type of billing is also relevant to those subscription businesses that require considerable upfront payments.

Whether a subscription business sells costly user licenses, one-time hardware setups, or anything else that requires expensive one-time fees, installment billing helps make these offerings more affordable.

This article will discuss all that you need to know about installment billing: its definition, usage, pros, cons, and the best software for implementation.

What Does Installment Billing Mean?

Installment billing means splitting the cost of a product or service in smaller amounts, and paying these amounts over a set schedule. This billing has been designed for scenarios where customers have to pay huge upfront amounts.

Instead of paying the total payment at once, they can divide that into more affordable chunks. Businesses and customers can mutually decide the payment schedule. Customers can pay weekly, monthly, bi-monthly, quarterly, and so on. The schedule can continue as it is till the whole amount is covered.

The payment can be scheduled in the form of plans. Customers are required to adhere to these plans. However, this schedule is not rigid. Customers can still choose to pay more than one installment if they wish to complete the payment faster.

Because installments can be arranged into a number of plans, they might seem similar to a subscription. However, subscription billing and installment billing serve different purposes, and carry different terms and agreements.

In a subscription, customers must pay on a regular basis, for instance, monthly. They cannot bypass their monthly payments, until they decide to cancel subscription. Moreover, if they wish to continue subscription, they can do so for as long as they want, they just have to keep paying monthly.

On the other hand, installments span across a certain period which cannot be extended at will. Installment payments have to completed in that given period. For instance, a five-month period in which the customer pays an installment each month.

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Moreover, installments might involve interest, which is not the case with subscriptions. Taxes also might be applied to each installment, according to its amount. Rather than paying tax on the full initial amount, users can pay it in smaller amounts with respect to each installment.

How Does Installment Billing Work?

These are the steps that are typically followed in installment billing:

1. Agreement of Terms

The very first is the agreement that takes place between the customer and the business. This includes the number and schedule of installments, and any other charges involved (like interest). Once the agreement is finalized, it becomes legally binding.

2. First Payment

Customers have to pay an initial payment first for the business to allow them service access. If it’s a physical product, then customer receives it at the initial payment, and then pays the rest of its price gradually.

3. Scheduled Payments

Customers then proceed to comply by the rest of the payments according to the agreed upon schedule. Some businesses might also allow customers to complete payments before the end date, if they wish to do it sooner.

4. Additional Fees

Businesses might charge additional fees per installment, such as interest or late fees. Interest on the total payment amount is also divided according to the number of installments, and charged alongside each. Businesses might apply late fees if any installment is not paid on time.

5. Completion of Payments

When all the installments are paid (along with any additional agreed-upon charges), then the customer can claim the full ownership of the product. They don’t have any further price to pay.

How is Installment Billing Used in Subscription Businesses?

There are some subscription scenarios where costly upfront payments are required. In these scenarios, installment billing can help customers pay without worry. Here are some examples:

• Subscription with Both Hardware & Service Fees

Some subscriptions offer installation of hardware, and their continuous service. For instance, if a user subscribes to a security alarm service, it includes the installation of the alarm device itself first. It also includes alarm service, such as 24/7 monitoring, and maintenance.

Hardware installations typically require one-time fees. The alarm installation can cost, for example, $200. Once it is installed, the subscription i.e. the alarm service can go on as usual. Customers can pay for that on a recurring basis.

Some customers might find the $200 upfront payment difficult to manage. That’s where installation billing comes in. Businesses can offer customized installment plans to these customers to pay the hardware fee with ease.

After customers deposit their first installment, they can get the hardware installed. They can pay for the remaining amount gradually. This amount can also be temporarily charged alongside the recurring service fees. Once the $200 is covered, the subscription can continue as usual.

• Subscription with Prepaid Annual Payments

Annual subscriptions typically offer customers greater value as compared to monthly or quarterly plans. While this discount might seem appealing, customers can still be discouraged from paying a huge amount upfront.

Businesses can make things easier for them by offering them installment billing. By paying for the annual cost in installments, customers not only get to benefit from the discounted annual amount, but also don’t have to pay for it in one go.

This doubles the benefits for them, and hence attracts more customers. In addition, businesses have a better chance of retaining these customers. That is because customers are likely to stay at least until they complete their payments.

• Subscription with One-Time User License & Recurring Online Services

Suppose there’s a subscription service that sells expensive one-time licenses for a cloud-based AI platform. Once the users buy this license, they can use the platform indefinitely. However, they are only able to access its basic features.

If they want to unlock its advanced functions as well, such as more cloud-storage or other premium features, they have to subscribe separately. Let’s say that the one-time license cost is $500, and the subscription cost for additional features is $25 per month.

Users can rely on installment billing to pay for the upfront $500 cost in smaller chunks. And if they want premium services along that, they can simply subscribe, and pay $25 on a recurring basis.

Installment Billing Vs Buy Now Pay Later (BNPL)

Both the installment billing model, and the Buy now pay later model allow customers to pay large amounts more flexibly. They are quite similar as far as their purpose is concerned. However, these models are not the same. They have differences which are important to understand.

Firstly, installment billing is offered by the merchant itself. Customers and businesses agree upon an installment plan, and then it is followed until the payment is complete. BNPL, contrarily, is not offered by the merchant. It is offered by third-party providers, such as Klarna.

A customer makes, let’s say a $100 purchase, and opts for BNPL with Klarna. Klarna pays the merchant this $100 in full at the time of the purchase. The customer’s pending payments then remain only between the customer and Klarna. The merchant has no role in it.

Klarna allows customers to choose between predefined payment schedules. For example, customers can pay in 4 equal parts over 4 months. This is also what sets BNPL apart from installment billing. The latter doesn’t involve predefined payment schedules. Instead, the schedules can be customized according to what both the business and customers agree upon.

Another difference is that installment billing might or might not include interest. BNPL is typically interest-free. Furthermore, installment billing is managed within a business’s billing platform. It doesn’t require any special integration. However, BNPL requires integration with third-party providers.

Overall, BNPL is more common in e-commerce scenarios where customers pay for one-time purchases in parts. It has no relation to subscriptions. Contrarily, installment billing is more suited to subscription-based services that involve both pricey one-time fees, and recurring payments.

Installment Billing Vs Recurring Billing

Recurring billing is associated with ongoing subscriptions. These subscriptions involve access to certain services, such as cloud-storage. In recurring billing, customers are charged fixed amounts based on their subscription plan.

The billing software keeps charging them at fixed intervals until the customers decide to cancel their plan. Customers can also flexibly modify their plan such as downgrade to a cheaper plan. Their billing is adjusted accordingly.

On the other hand, installment billing doesn’t typically apply to continuous services. It is designed for those products or services that require considerable upfront payments.

Customers pay for these products in installments following a customized schedule. Once they cover the entire payment, installment billing automatically ends.

What are the Pros of Installment Billing?

• Flexible Payments

Customers don’t have to be intimidated by costly one-time payments anymore. Installment billing divides their total payable amount into smaller chunks which are easier to pay over time.

This features allows more budget-conscious customers to benefit from a business’s offerings.

As a result, the business makes more sales. Additionally, in some cases, the total tax amount is also split, and divided across installments. This means that customers don’t have to pay their taxes in one go. Instead, they can pay for those in small parts too.

• Convenient Budgeting

Customers don’t have to face a financial crisis when they decide to buy a service. With installments in place, they can budget easily. What’s more, they can actually choose to customize their installment schedule in such a way that aligns with their budgeting needs.

Moreover, with installment billing, businesses can also create a predictable cash flow. By lowering the upfront service fees, they get to expand their outreach, and acquire customers that prefer financial flexibility.

• Stress-Free Commitments

Customers can tailor the installment plan according to their needs. They can decide to make smaller installments over a longer span of time too. This allows them to commit to the service flexibly.

They don’t need to be stuck in lengthy subscription plans, such as annual plans, that activate only after a huge one-time payment is made. In addition, customers can choose to complete their payment earlier than decided if that suits their budget better.

Why is Installment Billing Challenging Without Billing Software?

• Manual Payment Schedule Tracking

Without an automated solution in place, installment billing can get out of hand pretty fast. Firstly, it would require manual tracking of installments, and their dates. Human errors can lead to missed or delayed installments as well.

Moreover, failure to keep accurate accounts of each customer’s installments can lead to financial and legal complications. Installment payments can make accounting complex as well, especially for subscription businesses that offer both one-time and recurring payments.

• Risk of Payment Failures

Failed payments can disrupt the entire installments plan. Customers might not even complete their payments, either voluntarily or involuntarily. Businesses need to be proactive about tracking the deferred payments.

They must take immediate action to recover missed payments, in order to continue with the installments smoothly. Unfortunately, without billing software, this requires immense manual effort, and repeated follow ups with customers. There is no automated dunning available.

SubscriptionFlow Takes the Hassle Out of Installment Billing

SubscriptionFlow is an advanced subscription billing engine that facilitates easy installment billing. We automate your payment procedures to reduce your workload, and strengthen your cash flow.

Here’s a sneak peek into what we offer:

• Automated Payment Cycles: Set customer installments on automation. Our system deducts payments automatically at predefined intervals. 

• Custom Billing Schedules: Make your installment plans more flexible. Fully customize billing dates according to what your customers prefer.

• Real-Time Payment Tracking: Track customer installments in real-time. You have complete visibility into your finances.

• Dunning Management: Auto-send payment reminders when payments fail. Automatically retry payments for faster revenue recovery.

• Automated Billing Adjustment: Flexibly modify installment amounts, handle refunds, and apply late fees. SubscriptionFlow powers precise billing calculations.

Book a demo with SubscriptionFlow to know more about what we offer. Get all the help you need to implement installment billing seamlessly.