We’ve seen the “Buy Now, Pay Later” revolution in B2C finance with the likes of Klarna, and now it’s arrived to B2B finance – arguably a market with higher demand.
Hundreds of millions of pounds are now being poured into B2B Buy Now Pay Later (BNPL) by venture capital funds
It's changing the way businesses transact with each other, streamlining payments and shaking up the business lending market. Businesses who don’t review their model in light of this shift may get left behind.
How does it work
Once you’ve signed up (it’s free to sign up), you are given a payment link which can be added to your invoices or online sales portal, giving your business customers the option to “Buy Now or Pay Later”. The product can also integrate into your online checkout via API and has a fully integrated app on the Xero marketplace.
If your customer chooses the "Pay Now" option, you receive 100% of the money instantly, with no transaction fees (unlike when you receive card payments).
If your customer selects the "Pay Later" option, you still receive 100% of the invoice value up front, they receive 90 days trade credit, and you will never be asked for the funds if your customer does not pay them.
You can choose whether or not you want to pay the fees for the 90 days, which as a seller is fixed at 3%. Alternatively, the cost can be passed to your customer who will pay interest - at a representative 1.5% per 30 days.
What are the benefits
Free payments
Here’s how it compares to receiving money via traditional payment methods:
It’s always free for you and your customer if they “Pay Now”.
It gives your customer the option of extended trade credit terms
A customer might want to buy your product or service, but they might feel the upfront cost is too much for them.
The Pay Later option, spreading payments over 90 days, is an extra incentive to buy from you, perhaps helping you win more customers or increase order value.
It improves your cashflow
If your customer opts to Pay Later, you still receive 100% of the invoice value up front.
No more waiting around for 30, 60 or even 90 days for your client to pay, having to chase them up.
It reduces the risk of bad debt
At a time when company insolvencies are rising, this removes the risk of bad debt from your business.
As soon as your customer checks out, the BNPL provider settles 100% of your invoice – and they’ll never ask for the money back if your customer doesn’t pay.
For many businesses, it seems too good to be true.
Here are some frequently asked questions:
FAQs
We’re paying a fortune to receive online card payments; how can this company afford to provide this service to us for free?
The BNPL provider loses a little bit of money every time a customer selects Buy Now.
It’s not a lot though and they recover this expense when your customer selects Pay Later, on which they charge a 1.5% representative rate per 30 days.
Will all of my customers be eligible for Pay Later?
No. Firstly, the maximum exposure per debtor is £15,000. So, any more than this, and they won’t be able to select the Pay Later option.
There is also a quick credit check on your customer to check their affordability. The check is quick and easy, and the lender has a strong approval rate.
Will there be an audit of my invoicing process, to check my eligibility?
No. The provider does run some checks on you and your business, but these are not as invasive as auditing of invoicing. The provider supports businesses in many different industries and does not take security against invoices.
Unlike invoice finance, where the lender is lending you money and is therefore concerned about their security (your debtor book), with Buy Now Pay Later they have advanced a micro-loan to your customer. They don’t get involved in disputes about the goods or services you’ve provided.
This means that nearly all industry sectors are eligible, even ones that might not be eligible for traditional invoice finance, like permanent recruitment and business consultants.
I don’t have clean credit. Am I still eligible to offer this service to my clients?
The vast majority of businesses are eligible. The BNPL provider will be advancing funds to your customers, not you.
One business I successfully referred across was loss making and had a negative balance sheet.
Can this work alongside invoice finance?
Yes. There's no debenture or other security requirements for you to be able to offer this service, so it can work alongside that.
You can pick and choose which customers you offer Buy Now, Pay Later to.
While it may help bring down your utilisation and interest, you may still need a finance facility to fund your larger debtors (£15,000+).
Can I offer Pay Later to consumers and sole trader businesses?
No not at the moment. Only a UK Limited company can sign up to spread the cost of an invoice with Pay Later. There are lots of companies offering Buy Now Pay Later to consumers, but I only broker business finance so I can’t comment on these.
I don’t think my customers would pay the 3% fee for the Pay Later option, as I already give them lengthy trade credit terms for free. Could I pay this for them?
Yes, you can opt to pay the interest for them, if you’d prefer.
By way of example, if your customer paid a £2,500 invoice using Pay Later it would cost you £75 for the 90 days it was outstanding - it’ll never cost you more, even if your customer paid the BNPL provider late or defaulted.
You’re always paid the full invoice value instantly as soon as your customer finishes check out. The BNPL provider would invoice you for the £75 fee at the end of the month. No matter how long they take to pay - no late fees or additional costs whatsoever.
Also, you or your customer will only ever pay for days they use. They can make early payments or settle up at any time and save on interest.
Is there a cheaper way of getting paid up front and protecting against bad debts, whilst still offering my customers trade credit?
Potentially. You’d have to weigh up how much it would cost you to factor your debts and take out a bad debt protection policy. However, you might not even be eligible for these products due to your terms of trade or something else.
Especially for smaller businesses, single invoice factoring and single invoice insurance can be prohibitively expensive – sometimes 2.5% per 30 days for a single invoice factoring.
You can check out how much single invoice insurance would cost on Nimbla. Unlike BNPL, single invoice insurance would not typically cover you for disputes or protracted default (when your customer is able to pay but just delays and delays, for whatever reason).
For many businesses, Buy Now Pay Later will be a simpler and cheaper option.
I’m interested. I want to find out more before I sign up. Please can I have a demo?
Yes. I’d just need your business name, email address, and contact phone number and I can book you in for demo.
If you'd like to discuss anything related to business finance, please call me on 07485 724 024, or email me at ed.wileman@editfinance.co.uk