“Buy now, pay later” lenders are identifying a new market: small businesses

Record levels of inflation, rising interest rates and low levels of confidence continue to make things difficult for businesses. This is especially true for small and new businesses, which often need to invest a significant amount of start-up capital to purchase equipment, build inventory, or advertise.

One potential solution to this difficulty is Business-to-Business (B2B) “buy now, pay later” (BNPL) payment models. In recent years, BNPL has become popular with consumers, allowing them to spread the cost of purchases over a series of equal payments. If companies can do the same, some say, they can reduce risk and ultimately be more resilient.

  • Small and new businesses often need to invest a significant amount of upfront cash to get their ventures off the ground, but it can be risky.
  • In response, payment service providers are extending the BNPL model to the B2B space. These companies include Plastiq, Mondu and Billie, who now offer BNPL solutions for both B2C and B2B customers.
  • For small businesses, the availability of BNPL B2B represents both risks and rewards.

B2B payments are becoming more flexible

Many companies are currently facing unpredictable market conditions. Consumer demand remained stable in November, but many fear that rising interest rates and inflation could reduce it again at the start of the new year.

This risk means that responsible small businesses, and especially start-ups, find it difficult to justify significant upfront investments. However, many need to make just this type of capital outlay to prepare to meet initial business needs.

The situation is made even more difficult by the financial landscape. Right now, even the best short-term business loans are charging higher interest rates than they did a year ago, as they respond to repeated rate hikes from the Fed.

To meet these challenges, creative companies and lenders are looking to capitalize on payment models that have proven successful in the consumer market. Specifically, in recent years we have seen the popularity of the buy now, pay later (BNPL) model rapidly increase among consumers.

Payment service providers see this as an opportunity and are extending the BNPL model to the B2B space. These fintech lenders include Plastiq, Mondu and Billie, who are now pioneering BNPL solutions for B2B clients, although they also offer traditional pay-in-four loans to consumers.

The benefits of entering the B2B space for payment service providers are obvious. Not only is the average B2B payment larger than the average B2C transaction, Statista estimated in 2018 that the global business payments market is $125 trillion, more than double that of the global consumer market.

Risks and rewards

For small businesses, the availability of BNPL B2B represents both risks and rewards.

There are several advantages of the BNPL model for businesses, and especially for small businesses. BNPL allows these companies to spread over a longer period what would be significant and infrequent investments, for example in new stock or advertising.

This can help create “runways,” as Obvi CEO and co-founder Ronak Shah recently told industry analyst firm PYMNTS. BNPL can be used to smooth capital flows, improving the ability of small businesses to respond to short-term market fluctuations and ultimately improve resilience.

However, there are also some concerns about the continued rise of BNPL solutions. The Consumer Financial Protection Bureau has warned consumers that using this option regularly could increase the risk of getting into unsustainable debt. This is because it is tempting for consumers to think that they won’t have to make refunds right away and thus lose track of the multiple payment obligations they have accepted.

For businesses, BNPL’s risks are different. Well-managed businesses will keep a close track of their future debt obligations, so there’s probably a slightly lower risk of accidentally missing out on a repayment as long as the capital is available to meet it. However, simply keeping track of scheduled future payments, especially if a business uses BNPL frequently, can become a time-consuming task.

Second, some analysts have pointed out that corporate financing has traditionally relied on a lender possessing in-depth knowledge of a borrower’s business model and financial health. BNPL’s offering of ready-to-use solutions for businesses – essentially easily accessible lines of credit – can weaken this situation, making this type of loan riskier for both the lender and the borrower.

Another potential complication is the highly complex and fluid regulatory environment facing BNPL B2B providers. Each country has its own tax and reporting requirements for BNPL loans, making cross-border financing a potential minefield. In the United States, too, the regulatory landscape is changing rapidly: New York and California have passed laws requiring more information on down payments for consumer-focused BNPL financing, which could make BNPL B2B solutions more complex as well.

These risks are certainly real, but they can be reduced by lenders and borrowers undertaking due diligence on their BNPL commitments. The BNPL financing model can offer many opportunities for businesses, but it also presents new challenges.

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