Will Buy Now, Pay Later for Business Find Its New Year Niche?

Businesses looking for cash flow flexibility are increasingly leveraging buy now, pay later (BNPL) tools.

“Businesses need to create runways for themselves … and if you’re not using BNPL to do that, you’re not thinking in 12- to 18-month landscapes. You’re looking at only a few months,” Obvi CEO and Co-Founder Ronak Shah told PYMNTS in a November interview.

The emergent business-to-business (B2B) financing solution has evolved from a popular checkout option for consumers to a valuable money management tool for businesses looking to make big ticket purchases without losing access to short-term working capital and liquidity.

To be sure, the past three years have proved challenging for businesses of all sizes, in the face of a string of changing headwinds. When paired with rising anxiety and concerns, these downward macro factors have sparked an increase in demand for working capital and financial visibility.

PYMNTS’ research finds that a majority (54%) of Main Street businesses believe inflation is putting their sales forecasts at risk, and half fear economic uncertainty.

With the specter of a recession looming, business financing tools like BNPL have emerged as a hero product for those businesses who need to strategically conserve their financial flexibility heading into the new year.

The $125 Trillion B2B pool

While global B2B spend is estimated to be worth around $125 trillion, PYMNTS’ research speculates that smaller firms are carrying more than a trillion dollars of outstanding receivables, a situation that puts the resiliency of their balance sheet continually to the test, and even their solvency.

The way BNPL for business works is that the FinTech platform providing the solution underwrites the buyer and then pays the supplier in full immediately.

This gives the supplier needed instant access to cash, while simultaneously providing the buyer with greater cash management flexibility. A win-win-win situation that eliminates the risk of nonpayment and cash flow mismatch, with the FinTech also claiming a slice of the pie through fees.

On a dollar and volume basis, the value and quantity of B2B purchases are materially larger and more frequent than consumer retail purchases, making it an attractive market for BNPL providers to penetrate and capture larger fees.

Growth Potential

Levering BNPL as business financing tool can be a particularly useful option for small and medium-sized organizations that may be underserved by banks and other financial institutions hesitant to issue loans to unproven and smaller companies.

“These small business owners and founders are not going to be able to go and get funding from traditional sources, and they will not be approved for a loan,” Plastiq COO Stoyan Kenderov told PYMNTS in an interview last month.

This access to capital can help businesses grow and shows the increasing fluency of FinTech platforms with regards to helping companies bootstrap more efficiently by unlocking cash flow.

Underwriting Risk

The greater size and scale of the total addressable B2B market also comes with increased risks for BNPL providers.

Businesses don’t have “credit scores” like consumers do, making it harder for BNPL platforms to gauge whether the businesses they are serving can readily and consistently meet their “pay later” obligations.

In order to succeed, FinTech providers need to maintain robust internal risk management controls that ensure the solvency of the underwritten capital they’re providing.

A digital-first solution, BNPL platforms are also inherently susceptible to digitally native risks, including the many frauds and scams that lurk around the corners of the online ecosystem.

Bad actors using stolen email addresses and other tactics can fraudulently apply for lines of credit, and prevention tools like multifactor authentication are more challenging to enforce when businesses have authorized entire teams to make purchases on behalf of their organization. It is more difficult to validate a business, with its many individuals and components, than it is a single consumer shopping at a retail store or online.

Still, credit providers have always dealt with the unfortunate realities of fraud and risk — in a way, it is just the cost of doing business.

For those businesses considering using BNPL for the B2B needs, it is important to note that paying off a line of credit in installments becomes riskier when interest rates are higher.

Additionally, the fees may end up being more than those of preexisting solutions like regular corporate credit cards.