Companies such as Klarna have made access to credit at the point of purchase for consumers possible, but how does this model work for business-to-business transactions, and what are the risks involved?
Over the last few years, buy-now-pay-later models have become standard at online checkouts. As from November of 2021, 17 million UK consumers have retrieved credit at online checkout points.
Buy-now-pay-later for e-commerce is paving the way for this model transitioning into business-to-business payments, with solutions coming into the market and attracting investment.
Based in Berlin, Billie, is a solution which utilises Klarna’s technology in order to provide buy-now-pay-later at business-to-business checkouts, and has recently secured a $100 million, or £83 million, investment round.
It is clear that providing credit at checkouts is as attractive to businesses as it is to consumers.
According to Yasamin Karimi, global head of product strategy at Codat, an application programming system provider which assists small businesses with data tracking, “Part of the appeal of B2B BNPL is that it benefits buyers and sellers”.
On the one hand, “Sellers benefit from embedded processes, immediate payments and reduced admin as they don’t have to worry about reimbursement.”
And on the other hand, “Buyers benefit from increased supplier loyalty, reduced risk and avoid the reputational damage associated with making late payments.”
Karimi highlights that BNPL is actually an existent aspect of B2B transactions, with payments within 30 days being the statutory norm, and depending on the terms, invoices may take up to 180 days to be paid.
Therefore, the appeal of BNPL for many small businesses is the fact that there may be a solution to the problem of extended invoice terms and late payments.
According to the Federation of Small Businesses (FSB), 61% of small companies were affected by the late payment of invoices in Q1 of 2022, and an estimated 50,000 companies need to close down as a result of late payments.
As the FSB national chair, Martin McTague, said, “A worsening late-payment crisis adds to the cash-flow burden on small businesses,” who “are at the same time wrestling with spiraling operating costs, supply chain disruption and a widespread labour shortage.”
Despite invoices being paid on time, long payment terms enforced by larger operations can have lasting effects on small businesses and prohibit them from scaling, as they do not have the cash to invest in marketing, products or new talent.
The current economic climate has raised questions about how responsibly consumers are making use of BNPL solutions.
According to Citizens Advice, 42% of recent BNPL users needed to use their credit cards or other forms of lending in order to pay off their debts.
Is this form of irresponsible borrowing likely to affect businesses?
Karimi highlights core differences between BNPL when it comes to the B2C market and the B2B market, such as the fact that other than an occasional credit check, there is not much of a barrier to funds at a customer checkout.
On the other hand, since the average spend of a B2B transaction is usually much higher than B2C, there requires a much stricter underwriting process that utilises better quality data, so that B2B BNPL companies can mitigate challenges often seen with B2C, such as poor risk mitigation, large defaults and a lack of affordability checks, according to Karimi.
Karimi adds, “Businesses should take time to consider the decision, be confident in their ability to repay and ensure they have a thorough understanding of penalties and terms.”
Jamie Beaumont, CEO of Playter, a B2B BNPL provider, accepts the risks for businesses that access BNPL, especially in this economic downturn, saying “The B2B world is new. How you underwrite a person is much easier than underwriting an entire business.”
Playter offers small to medium sized businesses access to funds of up to £300,000 each year, in exchange for a yearly subscription fee, as opposed to charging interest.
Beaumont explains the service as a credit facility, allowing clients to repay suppliers in time, and then repay Playter over six to twelve months.