In the ever-evolving landscape of business finance, B2B Buy Now, Pay Later (BNPL) has emerged as a game-changer. While the concept of BNPL isn’t new, its application in the business-to-business (B2B) sphere has garnered significant attention in recent years. This financial tool is distinct from traditional forms of business financing, such as factoring or supply chain finance, offering unique advantages and disadvantages. In this article, we’ll delve into what B2B BNPL is, how it differs from other financing methods, its benefits, drawbacks, and its place in the future of trade finance.
What is B2B BNPL?
B2B BNPL is a financial arrangement that allows businesses to make purchases and defer payment for those purchases over a set period. Much like its consumer-oriented counterpart, B2B BNPL enables companies to procure goods and services promptly while providing flexibility in settling their invoices. However, the key distinction lies in its application to business transactions rather than consumer purchases.
What is the History of B2B BNPL?
The concept of B2B Buy Now, Pay Later (BNPL) has been evolving over the years, but its emergence as a distinct financial service gained traction more recently. The exact date and country of its first appearance can be challenging to pinpoint due to the gradual development of this financial tool and its adaptation from the consumer BNPL model.
The consumer BNPL services, such as Afterpay and Klarna, started gaining popularity in the early to mid-2010s. B2B BNPL likely followed as businesses recognized the potential benefits of similar payment structures for their own procurement needs. However, it wasn’t until the late 2010s and early 2020s that B2B BNPL solutions began to emerge with more prominence in various countries, including the United States, the United Kingdom, and Australia.
So, while the concept of B2B BNPL may have existed in some form earlier, it truly started to take shape as a distinct service in the latter part of the 2010s and early 2020s, and its adoption has continued to grow since then.
Differentiating B2B BNPL from Factoring and Supply Chain Finance
- Factoring: Factoring involves a business selling its accounts receivables at a discount to a third-party (the factor) to obtain immediate cash. It’s essentially a way to accelerate cash flow. In contrast, B2B BNPL focuses on allowing businesses to delay payments for their purchases, thereby conserving cash for other operational needs.
- Supply Chain Finance: Supply chain finance optimizes the cash flow within a supply chain by providing early payment options to suppliers at lower financing costs. B2B BNPL isn’t linked to supply chains but instead focuses on individual transactions, offering buyers more flexibility in managing their expenses.
How Do B2B BNPL Providers Make Their Money?
B2B BNPL service providers generate revenue through several avenues despite not charging interest on delayed payments for B2B debts. Firstly, they typically charge fees to merchants or suppliers for the privilege of offering BNPL as a payment option to their customers. These fees can be transaction-based or subscription-based, ensuring a steady stream of income for the service provider. Additionally, some B2B BNPL platforms may charge merchants a percentage of the transaction value, thereby earning a commission on each sale made through their service. Moreover, while interest-free, B2B BNPL providers might charge late fees or penalties to businesses that do not adhere to the agreed-upon payment schedules, which can contribute to their revenue.
Lastly, by gathering data on business transactions and trends, B2B BNPL providers can offer valuable insights and analytics services to merchants for a fee, assisting them in making informed decisions about their sales strategies. These diverse revenue streams allow B2B BNPL service providers to maintain sustainable business models while offering interest-free financing to their users.
Benefits of B2B BNPL
- Cash Flow Management: B2B BNPL helps businesses maintain healthy cash flows by deferring payments, allowing them to allocate resources to other critical areas.
- Flexibility: It offers flexibility in payment terms, enabling buyers to adjust payment schedules to match their revenue cycles.
- Ease of Use: B2B BNPL platforms are typically user-friendly, simplifying the procurement process for both buyers and suppliers.
Disadvantages of B2B BNPL
- Interest Costs: Delaying payments often comes with interest charges, potentially increasing the overall cost of purchases.
- Debt Accumulation: Overreliance on B2B BNPL can lead to a pile-up of debt if not managed carefully.
- Limited Supplier Adoption: Not all suppliers may accept B2B BNPL, limiting its utility in certain industries or supply chains.
Providers and Adoption
Several financial technology companies, including giants like Stripe and Square, have ventured into the B2B BNPL space. Additionally, traditional banks are exploring partnerships with BNPL providers to offer these services to their business customers.
The adoption of B2B BNPL is on the rise, particularly among small and medium-sized enterprises (SMEs) seeking to manage their finances more effectively. As companies increasingly recognize the advantages of this financing method, its adoption is expected to continue growing.
The Future of B2B BNPL Service Providers
B2B BNPL is poised to become an integral part of the trade finance ecosystem. As businesses look for more flexible and efficient ways to manage their finances, B2B BNPL providers will play a pivotal role in meeting these needs. However, they will need to address concerns regarding interest costs and ensure seamless integration into existing procurement processes.
In conclusion, B2B BNPL represents a promising evolution in the world of business finance, offering flexibility and convenience to companies of all sizes. However, B2B BNPL has its limitations: it mostly serves domestic markets and is not suitable for cross-border transactions that have different regulatory setups. Moreover, B2B BNPL is not a cost-free service. Providers that charge interest on the money that is lent until an invoice is paid are offering a service that structurally looks very similar to reverse factoring or supply chain finance. And if the B2B BNPL providers are monetising their services through selling on their customer’s data to other traders then there is a privacy issue that all companies that avail themselves of BNPL services will have to consider.
It seems probable that companies that are drawn to B2B BNPL are going to be those with plenty of spare liquidity, and the focus is more on attracting new customers rather than managing cash flow issues.
And finally, B2B BNPL does not offer a radical alternative to other types of trade finance in the sense that there still remains the risk of non-payment, fraud and disputes over delivered goods or services. There is still the need for credit insurance, KYC and AML protocols and the sharp intelligence of a financier that can assess the quality of the transaction seeking financing.