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

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

Record levels of inflation, rising interest rates and low levels of confidence continue to complicate business life. This is especially true for small and new businesses, which often need to invest a significant amount of initial capital to purchase equipment, build inventory, or advertise.

A potential solution to this difficulty is business-to-business (B2B) “buy now, pay later” (BNPL) payment models. In recent years, BNPL has grown in popularity with consumers, allowing them to spread the cost of purchases over a series of equal payments. If businesses 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 money to start their business, but this can be risky.
  • In response, payment providers are extending the BNPL model into the B2B space. These companies include Plastiq, Mondu and Billie, all of which now offer BNPL solutions for B2C and B2B customers.
  • For small businesses, the availability of B2B BNPL represents both risks and benefits.

B2B payments become more flexible

Many businesses are currently facing unpredictable market conditions. Consumer demand remained stable in November, but many fear that rising interest rates and inflation will reduce it again as we enter the new year.

This risk means that responsible small businesses – and especially new ones – find it difficult to justify large up-front investments. Nevertheless, many must make this kind of down payment in order to prepare for the initial needs of the business.

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 a year ago as they react to repeated Fed rate hikes.

To address these challenges, creative businesses and lenders are looking to capitalize on proven payment models in the consumer market. Specifically, in recent years, we have seen the popularity of the “buy now, pay later” (BNPL) model grow rapidly among consumers.

Payment providers see this as an opportunity and are extending the BNPL model into 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 four-way loans to consumers.

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

Risks and Rewards

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

The BNPL model has several advantages for businesses, and especially for small businesses. BNPL allows these companies to spread over a longer period what would be large and infrequent investments – in new inventory, for example, or for advertising.

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

However, the continued rise of BNPL solutions also raises concerns. The Consumer Financial Protection Bureau has warned consumers that regular use of this option could increase their risk of getting into unsustainable debt. Indeed, it is tempting for consumers to think that they will not have to make repayments immediately, and then to lose sight of the multiple payment obligations they have accepted.

For companies, the risks of BNPL are different. Well-run businesses will carefully track their future debt obligations, so there’s probably a little less risk of accidentally missing a repayment as long as the capital is available to meet it. However, simply tracking scheduled future payments, especially if a company uses BNPL frequently, can become a time-consuming task.

Second, some analysts have pointed out that business financing has traditionally relied on a lender with deep knowledge of a borrower’s business model and financial health. Offering off-the-shelf BNPL solutions to businesses – essentially easily accessible lines of credit – can undermine this, making these types of loans riskier for both lender and borrower.

Another potential complication is the very complex and fluid regulatory environment B2B BNPL suppliers face. Each country has its own tax and reporting requirements for BNPL loans, making cross-border financing a potential minefield. Even in the US, the regulatory landscape is rapidly changing: New York and California have passed laws requiring more advance disclosures for consumer-focused BNPL financing, which can also make B2B BNPL solutions more complex.

While these risks are real, they can be reduced if lenders and borrowers conduct due diligence on their commitments to BNPL. BNPL’s funding model can provide many opportunities for businesses, but it also presents new challenges.

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