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Offering credit to consumers

Offering consumer credit can be an effective way to boost sales. But under the Consumer Credit Act, most businesses that offer consumer credit must have a consumer credit licence. If you offer consumer credit, you’ll also need to ensure that your credit agreements are legal and enforceable.

Consumer credit licences

Your business is likely to need a consumer credit licence if you sell on credit to individual consumers (as opposed to business customers) or hire out goods to them for more than three months. This also applies for business customers who are sole traders or small partnerships. You do not generally need a consumer credit licence to offer credit to limited companies, or for business sales which are always worth more than £25,000.

You do not need a consumer credit licence to accept payment by credit card (unless you issue the card yourself). You can allow customers to pay in four or fewer instalments, within a year, without needing a consumer credit licence.

If you need a consumer credit licence, you apply to the Financial Conduct Authority (previously the Office of Fair Trading) and pay a fee. The Financial Conduct Authority can reject your application if they think you are not a ‘fit person’ to hold a consumer credit licence - for example, if you have a record of treating customers unfairly.

Offering consumer credit without a consumer credit licence is a criminal offence. As well as facing a fine or even imprisonment, any credit agreement will be unenforceable.

Consumer credit terms

If you offer consumer credit, you must give customers a credit agreement to sign. The credit agreement must give detailed information about terms such as interest rates, credit charges and so on. Unless the customer signs the credit agreement on your business premises at the time, there is a cooling off period during which they can cancel it.

There are no set limits on what interest rates you can charge, but an unfair agreement will be unenforceable. You may want to take advice on how you can use the consumer credit agreement to protect your business - for example, by retaining legal ownership of goods until they have been fully paid for.

Other requirements of the Consumer Credit Act include providing statements to customers with outstanding balances, and notifying them if they fall behind with their payments. Customers must also be allowed to repay any debt early, generally without paying future interest charges.

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