As buy now pay later offerings heat up in the consumer ecommerce world, many wonder how the BNPL offering will actualize itself in the B2B space, especially as countless industries in the world of business-to-business open ecommerce shops and B2B marketplaces.
The truth is that BNPL has always been a part of B2B payments, just under a different name and form. In this blog, we’ll dive into the key differences between B2C and B2B BNPL offerings, highlight the original BNPL: traditional trade credit, and share 4 ways B2B BNPL is evolving in 2023 thanks to consumer influence.
What exactly is Buy Now Pay Later?
Buy now pay later (BNPL) a type of short-term financing and payment solution that allows buyers (both business and consumer) to make purchases in real-time and then pay for them in the future.
On the consumer side of BNPL, this most typically takes the form of payment installments paid over a certain amount of time. For instance, a $100 sweater will be broken into 4 monthly payments of $25. BNPL “lending” is typically easy to access, and loans do not accrue interest or affect credit score if paid on time.
Of course, consumer credit cards could be seen as the original BNPL, but the rendition we’re seeing in recent years of BNPL in the consumer world is fairly new, with fintech lenders like Klarna, Affirm, Afterpay and others looking to partnerships with businesses and brands to make this offering available to a wide customer base. And it’s exploding—B2C BNPL is estimated to reach 900 million users globally by 2027, driven by the expected economic downturn and the low cost of accessing credit in this way. The economic potential is so great that established payment companies, like Paypal, have also created their own BNPL offering.
The actual term, “BNPL for B2B”, is fairly new in the industry, but it’s catching on quickly. The concept of BNPL for B2B, however, has been around since the beginning of trade. In classically industrial verticals like lumber, steel and others, where businesses are purchasing hundreds of thousands worth of product from one another, paying upfront has never been the standard, due to cash flow constraints. As such, for hundreds of years, business-to-business transactions have relied on a system of trade credit (also known as net terms).
Trade credit, explained
Traditional trade credit is the preferred method of payment for most industrial business-to-business transactions. It encompasses two parts, both with the intention of easing the strain on cash flow:
A merchant does a credit check and then approves a buyer a certain dollar amount for a line of credit. The buyer is then free to make purchases using that credit, and pay the dues at a later date. The working capital for financing traditionally comes from your own balance sheet, a bank loan from a financial institution, a third-party lender or an invoice factoring service.
Net terms refers to the period of time in which payment must be made for the order (that was made possible through financing).
When the order is made, the merchant will send the buyer an invoice with the final price. The buyer then must pay within the agreed-upon payment terms, or their payment will be considered late or overdue.
The most common net terms period is 30 days, or net 30, but can also be net 7, net 15, net 45, net 60 and longer, depending on the business and industry-specific requirements. Our own internal research shows that 98% of credit offerings in B2B are for net 30.
The standard qualification process
Like other loans, in order to access financing and net terms, businesses need to go through a qualification process to prove they have good financial standing. As such, it’s incredibly important that the underwriting and credit decision is thorough and based on as much information as possible. What that means is that across industries, the qualification process has long been, and still mostly is, a laborious, slow process.
Most require lengthy onboarding, where applicants must fill out a long paper form, provide references, bank details, and some even require applicants to give their SSNs and sign a guarantor statement that will affect them if there are outstanding payments. After filling out the form, applicants must mail, fax or email the application back to the merchant and wait, sometimes a few days or even weeks to know if they are approved. It is only once they receive that approval that they can start purchasing using the trade credit they’ve been granted.
For the merchants, the trade credit qualification process is no easier— they are bombarded with paperwork and have to manually check information. They spend hours contacting references and making sure the buyers are in good financial standing. Not only that, they need to keep track of invoices sent, payments made, and overdue payments. Even for those who’ve moved to online forms for qualification requests still have to go through each application manually to vet buyers.
B2B BNPL in 2023
Thanks to the digitization of B2B, the strategic move to B2B ecommerce and marketplaces, and the influence of B2C payment trends, trade credit, and as such, B2B BNPL, is improving in 2023. Here are 4 ways we’re seeing this domain evolve and its impact on B2B businesses:
Dynamic digital applications
Consumers are very much used to clicking a qualification link and completing the application in minutes, and now that capability exists for business purchases as well.
Instead of printing out a PDF and then sending it back, B2B buyers now can follow a link to begin a qualification flow. The dynamic application flow itself utilizes all available data sources and adapts to each business's size and provided information, ensuring a personalized application experience for all applicants.
As a result, the time-to-approval is greatly reduced and business buyers can finish onboarding and start making purchases much faster.
Better underwriting and instant qualifications
Strict eligibility requirements like personal liability are outdated and no longer necessary, thanks to available Credit Bureau data, plus real-time bank account linking and verification. Even small businesses and newer businesses, who have historically had a harder time being approved for trade credit, can access credit terms because of these accessible, thorough vetting capabilities.
In addition, many B2B BNPL solutions enable eligible businesses to obtain credit lines instantly, so they can begin purchasing immediately, creating faster and more opportunities for new revenue.
More flexible financing options
With better visibility, more thorough underwriting and a faster process overall, businesses will be able to access more flexible financing options, and faster. For instance, revolving credit, the idea that a buyer’s credit line can be increased once they prove their good standing, traditionally can take as long as the qualification process itself, requiring lots of back-and-forth communication.
Now, with the technology capabilities available, merchants have the tools to approve buyers for higher credit limits instantly, after looking over all of the data of their payment history, which they can see easily.
The impact of this is two-fold: firstly, it enables buyers to access more product and make larger B2B purchases on credit, thus expanding their own businesses. That also means higher average order values and greater revenue for merchants.
Improved visibility with a robust control center
Gone are the days of paper files, messy spreadsheets and siloed data, thanks to a “control center” that both improves communication between merchants and buyers as well as provides better visibility into the details of each buyer’s approval. Merchants can see in real-time the status of each buyer, whether or not they’ve completed an application, their credit limit (and history), and all associated transactions.
But these platforms go beyond visibility: at the click of a button, merchants can approve buyers, grant them higher credit limits and send multiple buyers at one company one link for the approval process that can give them all access to their company’s credit account.
With all buyer data in one centralized place, AR teams stay in control, can see all outstanding, paid and future dues, and make informed decisions based on that information.
A BNPL offering optimized for B2B ecommerce
At Balance, we’re building products to address the real, unique challenges of B2B ecommerce.
We’ve tackled digital trade credit in a way that streamlines the order-to-cash (O2C) cycle. Features include: a dynamic credit application, instant qualifications, upfront payments to merchants, rolling credit capabilities, a control center to manage all buyers from one place and multiple payment options to pay for invoices.
We’re taking the burden out of offering trade credit, enabling businesses to focus on growing their revenue and scale quickly. Learn more about digital trade credit here.
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