Buy Now Pay Later (BNPL) is a financing model that has seen rapid growth in the business-to-consumer (B2C) environment in recent years, with companies like Klarna and Afterpay partnering with retailers to offer extended credit facilities to shoppers.
While the concept has been adopted by some business-to-business (B2B) organisations, its footprint has been relatively limited to date, with most business sales offered on short credit terms such as 30 days.
That is beginning to change, however, with a growing number of B2B organisations now offering BNPL options to their customers. In this post, we look at the factors driving that growth, and how BNPL can solve some of the typical financing problems faced by small and medium-sized enterprises (SMEs).
What is BNPL, and why is it becoming more important from a B2B perspective?
At its core, BNPL is a short-term lending facility. It allows buyers to purchase goods and services on extended credit terms and pay for them later, spreading the cost and protecting their cashflow. The seller, meanwhile, receives full payment for the sale via the BNPL provider – thus enabling them to maintain their own cashflow.
Two factors are helping to drive the adoption of BNPL in B2B:
- Digital procurement: Most B2B suppliers offer extended credit terms as standard when selling to customers offline. With more businesses now buying and selling goods online, BNPL provides an effective way to introduce a similar financing mechanism into their digital procurement processes.
- A weaker economy: Inflation and rising costs mean that many small businesses have seen cashflows contract in the past year. For suppliers, BNPL acts as a sales stimulant, providing customers with immediate access to product rather than forcing them to defer a purchase until they can pay in full.
How does BNPL work in practice?
Typically, the credit facility for a BNPL offering is provided by either a financial institution or the financial services arm of a large corporation – and there are clear opportunities for both parties.
For banks and other financial organisations, the focus is on partnering with corporations in order to offer a BNPL service to customers as a form of embedded finance. The advantage to doing so is that it opens up a new engagement opportunity, providing direct access to SMEs via an active and trusted channel.
The services of a partner may not be required, of course, if a supplier is large enough to operate its own financial services division. Many large corporates have developed these offerings with the express intention of providing financing to customers, and BNPL simply offers another mechanism through which to drive sales.
What factors need to be taken into account when developing a BNPL offering?
Naturally, risk is one of the major considerations around BNPL. By deferring terms, a supplier is essentially elongating its risk, with the danger being that the buyer will not be able to pay when the invoice becomes due. Credit checking and controlling of exposure is essential. Credit insurance can help to mitigate risks, although insurers will often refuse to cover debt over longer periods.
Staggered payments, whereby a buyer pays in instalments, may also be an option for those who wish to minimise their exposure. Regardless of the structure of a BNPL programme, the priority should be on ensuring the credit-worthiness of any participant. Being able to track the purchase volumes and overall position of a debtor is essential to managing risk.
The technological aspects of a BNPL offering also require careful management, with the seamless integration of financing elements into wider procurement processes requiring an API-based approach.
Our recent work with a global manufacturing business to enable its own working capital finance programme is testament to this. Here, Lendscape integrates with the manufacturer’s existing customer portal, with the BNPL process initiated when a buyer places a purchase order. Background checks on account status and credit limits are conducted, with orders and invoices then processed automatically – and with the appropriate BNPL terms included – upon approval of the purchase.
Finally, from an operational standpoint, the right legal positioning is critical, as is the ability to work with different languages and currencies for any organisation that wishes to offer a cross-border or multi-country BNPL services.
How is BNPL solving SME financing problems?
BNPL offers clear opportunities to financial institutions and suppliers alike. At the same time, it also serves to tackle some major issues relating to SME financing.
- It bridges the gap between purchase and revenue: For purchases that will be monetised in some way, BNPL helps to minimise the burden on a SME’s working capital. This is particularly true in relation to assets that have a “warm up” time – those that are planned to be resold, or become part of a larger product, for instance. Essentially, BNPL ensures that there is a smaller time gap between paying for an item and that purchase generating revenues.
- It provides a viable alternative to traditional financing channels: Access to formal lines of credit has been a consistent challenge for SMEs. Many businesses’ growth aspirations are held back out due to the formalities associated with traditional credit facilities. BNPL provides a frictionless and comparatively low-touch alternative.
- It simplifies financing by wrapping it into existing processes: By embedding BNPL into their procurement and purchasing systems, suppliers can turn what can otherwise be a complex application process into a literal tick-box exercise. SMEs can simply choose the BNPL option when placing their order (or upon receipt of the invoice).
Aside from internal efficiency savings generated by digitalisation, new solutions and business models are set to drive future growth for finance providers. With that, BNPL is a powerful “add-on” for more traditional factoring providers as there is a growing opportunity to enable online B2B commerce sales while improving margins - evidenced alone in the recent explosion of partnerships and fintechs in the space.
Where should finance providers start? Simpler, safer and easier, should be the cornerstone of thinking, while technology and strategic partnerships are essential to streamlining processes and creating intuitive user experiences. Tailoring the buyer-seller journey will be of the utmost importance, but BNPL has the potential to be an innovative solution that addresses some of the current challenges of SME financing - offering finance providers the ability to capitalise on the growth of online B2B trade.
At Lendscape, we're driven to deliver unique and innovative solutions that meets the evolving demands of the secured finance industry. Speak to us about how to supercharge your seller's operational processes and deliver seamless ordering and buying for online B2B buyers.
Article written by:
Kevin Day & Iain Gomersall