With digital transactions gaining traction in the modern business sector, sellers and buyers are looking to opt for more innovative payment methods. For India's MSME sector, hassle-free working capital financing is crucial to maintain its proper functioning. Consequently, the Buy Now Pay Later (BNPL) model has emerged as a favoured B2B payment option that can revitalise Indian businesses.
1) How Does BNPL Work for B2B Payments?
The short-term financing method of BNPL has long been considered the cornerstone of customer-centric B2C models. However, with the evolving nature of the B2B sector, market experts have underlined the importance of integrating this scheme for business transactions. With the BNPL industry projected to grow tenfold in India in the near future, its exponential impact on the Indian economy is palpable.
The Buy Now Pay Later model is a closed-loop short-term financing solution that is considered a reliable alternative to traditional financing. This model allows business dealers, retailers and distributors to purchase raw materials needed to keep their businesses afloat without requiring a lump sum payment upfront.
BNPL is an effective B2B payment solution for this country’s MSMEs. Despite contributing to around one-third of the nation's GDP, their lack of capital and assets make them high-risk borrowers for traditional lending institutions. The lack of proper access to credit is an obstacle hindering the sustainable growth of startups and small businesses.
Consequently, small business owners are turning towards the more innovative B2B payment options that can cater to their needs in a user-friendly manner. As a result, the notion of Buy Now Pay Later for B2B transactions has become one of the most successful economic trends of recent times.
In this model, fintech services perform the role of a financial intermediary and grant lending solutions to small businesses. These intermediaries pay off the upfront payment charges of the total selling price of the raw materials to the sellers on behalf of SMEs. On the other hand, these businesses can pay back their financiers via instalments over a predetermined period.
The small business owners can opt for cost-reduction via process optimisation in this transaction model. BNPL for the B2B sector offers a prompt solution to their liquidity issues without adversely affecting their balance sheets. Moreover, as BNPL functions analogously to a no-cost EMI, it relieves these SMEs of budget concerns. With an unrestrained cash flow, businesses can accomplish future investment or expansion goals.
It is important to note that not only the MSMEs but also the traditional blue-chip companies too can opt for the B2B payment option of BNPL. As a result, this credit solution can significantly impact the overall economic development of the business sectors of this country. This, in turn, can offer these industries a competitive edge in the global marketplace.
BNPL for B2B is a beneficial payment option because it offers:
Applying for traditional credit funding can be a lengthy course of action, with rigid regulations and a complicated documentation procedure. Alternatively, the BNPL lending protocol is decentralised by nature, allowing a lenient administrative configuration. For instance, a platform like KredX allows business buyers to seamlessly make purchases by offering a simplified documentation process.
Additionally, the eligibility criteria for this B2B payment solution are significantly diverse and inclusive in nature. Therefore, micro, small and medium enterprises can opt for this facility without needing any collateral. With this lending system functioning similar to unsecured consumer loans, production and general management of the businesses can work frictionlessly.
When opting for credit cards, borrowers spend a hefty amount of additional money because of annual maintenance fees or cash advances. Therefore, BNPL for B2B is a much-needed cost-effective measure for cutting down these adjunct expenses.
Additionally, when it comes to missed payments, the Buy Now Pay Later model is more permissive than credit card schemes. A borrower might have to pay up to 48% interest rate on a missed payment for a credit card. In contrast, the interest rate stays between 0% and 25% for BNPL.
Financial organisations providing funds to business owners opt for a more practical and broad-scale approach when running a credit check before fund disbursal. Other than conventional credit data, these fintech agencies also check alternative data from sources other than traditional credit bureaus.
Using this alternative data as an operational blueprint, BNPL as a B2B payment option mitigates the risk of offering goods/services on credit exponentially. For instance, AI algorithms can provide a general overview of a company's solvency when they apply for funding. Additionally, it opens up the door for New to Credit (NTC) businesses too.
The digitised sales process and advanced user experience offered by a BNPL platform are also beneficial for B2B sellers. As these businesses get immediately paid after making a sale, it ensures their robust and steady development.
Moreover, if a business is offering a BNPL option, it would naturally be deemed more lucrative by its customer base. So, a company's average order value and sale per customer can improve considerably over a short period. The companies can also witness a better cart conversion rate and fewer point-of-sale dropouts.
Notably, the sellers have to bear the cost of a 48% merchant discount rate for accepting debit and credit card transactions. Opting for BNPL allows these merchants to save on these processing fees. In contrast, leading fintech agencies allow merchants to save up to 2% of the discount rate. They can also spend it to attract new customers.
From the above points, it is apparent why BNPL has been favoured by sellers and buyers alike as an alternative B2B payment option. With fintech services like KredX offering cash flow-based metrics to business sellers, the uncategorised business sector of India is witnessing a reinvigorated approach towards lending.
Paying off small-ticket loans can help improve the creditworthiness of NTC business buyers and companies with lower credit score.
The average sales per customer can increase up to 40% for anchors opting for the BNPL model.
Most leading FinTech services decide the maximum credit limit on a case-to-case basis.
Businesses can decide who to offer BNPL access and the terms and conditions of the credit facility.