“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 make things tough for businesses. That’s especially true for small, new businesses, who often need to invest a significant amount of upfront capital to purchase equipment, build inventories 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 risen in popularity among 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 risks, and ultimately be more resilient.

B2B Payments Are Becoming More Flexible

Many businesses are currently facing unpredictable market conditions. Consumer demand held steady in November, but many are nervous that rising interest rates and inflation could reduce this again as we enter the new year.

This risk means that responsible small businesses – and especially new firms – are finding it difficult to justify significant upfront investments. Nevertheless, many need to make just this kind of capital outlay in order to gear up 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 were a year ago as they respond to the Fed’s repeated rate hikes.

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

Payment providers see that as an opportunity, and are extending the BNPL model into the B2B space. These fintech lenders include Plastiq, Mondu, and Billie, which are now pioneering BNPL solutions for B2B customers, though they also offer traditional pay-in-four lending to consumers.

The benefits of entering the B2B space for payment providers are obvious. Not only is the average B2B payment larger than the average B2C transaction, but 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 B2B BNPL represents both risks and rewards.

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

This can help to create “runways,” as Obvi CEO and Co-founder Ronak Shah recently told industry analyst firm PYMNTS. It’s possible to use BNPL to make capital flows smoother, 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 on a regular basis could increase their risk of getting into unsustainable debt. That’s because it’s tempting for consumers to think that they won’t have to make repayments immediately, and then lose track of multiple payment obligations they’ve agreed to.

For businesses, the risks of BNPL are different. Well-run businesses will keep careful track of their future debt obligations, so there is likely a bit less risk of accidentally missing a repayment as long as capital is available to meet it. However, merely keeping track of scheduled future payments, especially if a business uses BNPL frequently, can become a time-intensive task.

Secondly, some analysts have pointed out that business financing has traditionally relied on a lender possessing an in-depth knowledge of a borrower’s business model and financial health. Offering off-the-shelf BNPL solutions to businesses – essentially easily-accessible credit lines – may undermine that, making these type of loans more risky for both lender and borrower alike.

Another potential complication is the highly complex and fluid regulatory environment that B2B BNPL providers face. Each country has its own tax and reporting requirements for BNPL loans, making cross-border financing a potential minefield. Even within the US, the regulatory landscape is changing rapidly: New York and California have passed laws requiring more disclosures on advances for consumer-focused BNPL financing, and these may make B2B BNPL solutions more complex as well.

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