Doing small business finance differently with BNPL

Having demonstrated its value among consumers, it’s no surprise that businesses want a slice of the buy-now-pay-later (BNPL) action too. And for those who have adopted it, the benefits are clear with firms reporting a reduction in working capital pressures, easier access to credit and improved conversion rates.

To find out more about this exciting topic, Marqeta’s API Chronicles livestream team gathered together three innovators in the B2B BNPL space - Ed Brandler, co-founder and Chief Commercial Officer at Two, Jordane Giuly, co-founder of Defacto, and Malte Huffmann, Mondu’s co-founder and co-CEO.

The session, titled B2B buy-now-pay-later: small business financing done differently, was seamlessly led by fintech evangelist Olivia Minnock, Senior Partnerships Manager at MMOB.

In setting the scene, Olivia recalled research featured in Marqeta’s recent B2B BNPL white paper, which showed that half of European SMEs had between £10,000 and £75,000 tied up in outstanding invoices each month. For these businesses, this equates to between 5% and 20% of revenue.

Fast and frictionless: why BNPL is a winning formula for businesses

After describing their own journeys into B2B payments, the panel discussed the attraction behind buy-now-pay-later - and for Ed its appeal lay in technology.

“That little pink button is the one that you just click and you're done. There's nothing else to do. There's not even a CVV that you need to add. It's just so convenient. Even if you don't strictly need to split up your payments into multiple stages - and my most recent purchase was for a bicycle helmet costing £80 - there was no real need for the credit, but an absolute desire to end that transaction there and then by clicking a button,” he said.

Malte also appreciated BNPL’s frictionless experience, enabled by real-time underwriting at checkout and a variety of easy-to-understand settlement options.

Interestingly, when it comes to the fundamentals of buy-now-pay-later, there’s little difference between consumer and business propositions.

How B2B BNPL differs from B2C

The key contrast however is the need to consider a wider range of personas, as highlighted by Jordane, who said: “While for an e-commerce customer it’s easy to make the decision around instalments because they own the funds. But for B2B it’s a bit different.

“This is particularly the case for larger businesses, where the buyer may be someone from your marketing team or purchasing department, so you need to incorporate those types of specificities when it comes to making a credit decision.”

Delving deeper, Ed explained that there were three entities in any B2B transaction. “There's the person who's driving it, the agent who's making that purchase. There's their boss or the ultimate business owner, who might be the one who has to give the green light or not. And that could be the same person.

“And then there's a third entity that doesn't exist in B2C land. That's the legal entity, the company that's actually making the purchase. Tying those three together is the key element here in successfully implementing a B2B payment method,” he said.

SME variety creates need for an inclusive approach

Another point to consider in designing a B2B BNPL proposition was the diversity of end users and their level of tech adoption. While digital innovation is undoubtedly a driving force in innovation, the panel heard how there was a significant market opportunity in catering for a wide range of businesses, some of which are yet to deploy modern online tools.

This was a point eloquently picked up by Malte: “I look at our customer base and we can see that we have customers from diverse industries including fashion, construction materials, food and beverage, electronics etc. We are in the business of enabling merchants to offer customers their favourite payment methods and one of the most flexible payment terms.

“We’ve also seen in B2B transactions there are a lot of products that still require some sort of consulting from a buyer sales representative. And therefore, just like telesales, field sales or even sales at trade fairs, they seem to be really important, and so it was clear for us very quickly that we would need to also support these multi-channel use cases.

“Alongside this, there is a very interesting segment coming up and that is B2B marketplaces, which are looking to offer payments on their platforms.”

Alternative credit scoring: the essential ingredient in short-term lending

Powering lending decisions in B2B BNPL is data which, according to Ed, is delivering new types of insights on company trading positions. This is breaking down long-standing credit scoring barriers and enabling merchants to reach and serve a bigger market.

In comparison, Ed argued, traditional bureau default probabilities are based on a 12-month calculation - rendering it unsuitable for BNPL, as buyers are typically only borrowing for 30 days. In Ed’s opinion, this is resulting in missed transactions.

However, he went on to describe how firms until relatively recently were without an alternative, with some brave businesses using the likes of spreadsheets and web searches to build a picture of a buyer’s ability to repay. This, he said, was lending “on a wing and a prayer”.

“That works until it doesn't work and when it doesn't work the losses are very painful to bear,” he said, adding that it was a “game changer” for most merchants to offload this activity on to a third party.

Seamless B2B lending opportunities embedded everywhere

In defining the mission of any B2B BNPL proposition, perhaps the final word should go to Jordane. He believes that the role of businesses such as Defacto, Mondu or Two, is to provide an easy-to-use alternative to traditional lenders.

“We want to make it super simple and super fast for SMEs to basically get the right amount of cash to do the relevant amount of spending, but making it as easy as possible and that's really the area of focus.

“Additionally, we strongly believe that embedded lending is going to completely shift the user experience. Whether as a consumer or as a business, you don't need to physically or digitally go to a credit institution to get some credit, but you can access it directly from your preferred platforms.

“This could be an e-commerce website where you have your recurring purchases, or it could be your accounts payable or accounts receivable or your favourite marketplace, where you already are spending most of your time making purchases or managing your business.”

To watch the B2B buy-now-pay-later: small business financing done differently livestream in full, click here.

You can read the report here.