B2B BNPL versus Trade Credit – which one is better for financing?

Trade credit in B2B has traditionally been a widely used instrument for national and international financing agreements. According to the World Trade Organisation, as much as 80-90% of all international agreements depend on trade credit. It is an attractive way for buyers to enforce financing without the need to apply for a costly loan from a bank.

This article will highlight the pros and cons of trade credit. BNPL will then be discussed as an obvious financing alternative. So, as a merchant, are you looking for innovative ways to boost sales while saving costs? In this blog post, we’d like to compare how traditional trade credit works and highlight the benefits of using B2B BNPL for merchants.

Trade Credit Meaning

The definition of trade credit is an agreement in which a buyer purchases goods from a merchant, not settled immediately but at a later date. Through trade finance, a company can purchase goods and sell them immediately before they have been paid for. Usually, sellers give a trade credit payment term of 30 days or, exceptionally, a longer payment term of 45, 60 or 90, or even 180 days to pay the invoice.

Trade credit is a form of financing in which no interest is charged over the repayment period.  It is, therefore, an advantageous loan for the buyer, especially because the buyer’s cash flow is maintained in the short term, which allows more money to be freed up for investment in the company’s growth. For example, in startup costs such as advertisements or inventory.

Benefits of Trade Credit for Buyers

A trade credit financing agreement is a beneficial solution for buyers. A successful example from the market is Apple’s first purchase order during its startup phase. In this trade credit financing agreement, Apple used trade finance to retroactively cover the cost of their purchased goods with a new revenue stream. Apple’s first computer order is, therefore, a good example of trade credit use.

This first purchase order came from a local computer store. Steve Jobs then took this purchase order of 50 personal computers to a parts supplier and used this as leverage to buy computer parts. He then bought parts for 100 computers against trade credit terms and a deferred payment date. The computer store paid for 50 computers, with which Jobs could then pay the parts supplier. Thereafter, he managed to sell the remaining 50 computers at a surplus.

Trade Credit for Merchants Less Favourable

Trade credit may be an attractive form of financing for buyers, but it is not often advantageous for sellers. After all, there is no immediate payment for a purchase. For example, a deferred payment term of more than 30 days is beneficial for the buyer but also generates a risk of default with merchants. Often merchants give buyers a discount if an invoice can be paid faster. But this burdens additional costs with the seller.

For trade credit financing, different payment conditions and terms can be agreed. For example, a typical discount is 2% when the payment is made 10 days after the trade finance agreement, also called the 2/10 net 30 agreement. In practice, however, such agreements are difficult to administer for both the buyer and the seller, and invoices and payment terms risk being mixed up without a costly CRM system.

The merchant has to deal with financial disadvantages. Delayed revenues can become problematic for sellers who struggle to cover their ongoing operating expenses. Sellers also incur administration costs for managing complex agreements, in addition to debt collection costs that are looming in the event of non-payment.

How BNPL in B2B Works

Today, we live in a world where factors such as inflation, high energy prices and reduced purchasing power influence the market. To meet the desires and preferences of stakeholders in the B2B space, other forms of financing have arisen in addition to trade credit. In this section, we explain this concept, but above all how BNPL from PastPay can provide both buyer and seller with an improved financial security.

In a financial landscape where groundbreaking innovative financial applications are being invented, the risks of traditional trade credit agreements are being mitigated by alternatives. The Buy Now Pay Later (BNPL) concept originally came from the B2C market, but has now also gained practical use in the business to business area.

Buy Now Pay Later is a form of financing which addresses the flaws arising from traditional trade credit financing agreements. In particular, the risk of default for the seller and high costs for the buyer are now finally being mitigated. In the following paragraphs you can find out more about how BNPL can benefit merchants and buyers.

BNPL Payments

BNPL is, comparable with traditional trade finance, a form of financing in which the buyer is offered the opportunity to repay at a later date. It can be agreed to pay back on a future date against the terms agreed by the merchant and the buyer. The repayment of BNPL financing is free of interest or other costs, which is very beneficial for the buyer. On the merchant’s side the risk of default is borne by the third party BNPL financier along with the associated operational costs.

Suppose the merchant has chosen to offer the BNPL payment method to buyers, good news! From that moment on, it is possible for buyers to choose a BNPL provider by selecting PastPay from the payment options, in addition to conventional direct payment methods such as credit card, bank transfer or e-wallets.

1. Select the desired payment method: BNPL

Your webshop visitor wants to make a purchase via the webshop and is presented with a number of payment methods in the payment menu. In addition to using traditional payment methods, the visitor can select BNPL from PastPay. After selection, the webshop will provide the necessary invoice and VAT data to PastPay, which will then carry out the necessary background checks.

2. Green light from PastPay

The buyer who wishes to make a purchase with BNPL will receive the green light from PastPay upon approval. The buyer then gets direct access to the BNPL service and the merchant can immediately draw up the payment terms. The service is fully integrated into the payment system, so that invoices and payment conditions can be exchanged immediately.

3. A Purchase With BNPL

When the buyer is approved, and the seller is connected to PastPay’s payment network, the purchase can be completed. PastPay will transfer 100% of the invoice amount to the seller and the buyer can in turn pay PastPay the amount interest free in accordance with the agreed payment conditions and deadline.

Buy Now Pay Later Market Size

The growth in internet purchases globally has greatly increased the market share of webshops within B2B BNPL. Economic uncertainty has convinced Small and Medium Enterprises (SMEs) in particular of the usefulness of such favourable financing agreements. To facilitate growth in the startup phase of a company, SME entities have a necessity to make strategic investments.

In a time where consumer confidence is low, it can therefore be useful to enter into a B2B BNPL agreement as a buyer. Especially small and medium enterprises benefit from the fact that early investments in advertisements or the buildup of new inventory can be spread over a longer period of time, free of costs. In this way, the resilience of the companies increases and any market fluctuations can be anticipated.

BNPL in the B2B arena is especially popular in the world of webshop purchases. As more and more people and companies worldwide are connected to the internet, the number of internet purchases will increase sharply. According to Precedence Research, BNPL’s total market value will increase from more than $100 billion in 2021 to more than $3,000 billion in 2030.

Is B2B BNPL Better Than Trade Credit?  

Did you know that modern BNPL payments aren’t as complicated as they seem? In a world where the demand for BNPL services is greater than ever, specialised payment providers have appeared on the market. Where trade financing often uses cumbersome and outdated technology, BNPL payment mechanisms are also streamlined by digital technology, with all the advantages that this entails.

Buy Now Pay Later Benefits

So are you looking for a responsible financing agreement? It is then important to select a payment provider with favourable conditions. In addition, it is essential that the risks and interests of both the buyer and the seller are taken into account. In light of this, PastPay has an attractive BNPL service package in-house, which provides a number of advantages over trade credit financing.

• Less financial risk for the seller: The risk of default offor the buyer is surely a thing of the past. With PastPay’s BNPL financing, the merchant immediately receives the purchase amount. PastPay as the BNPL provider bears the financial risks.
• Less risk for buyer: Unlike trade credit or credit card payments, the creditworthiness or credit score of buyers will not be compromised in the event of non-payment. That is because BNPL financing is considered the same as factoring and not a loan.
• Reduced costs for the buyer: The customer at your webshop can, if paid on time, make free use of deferred payment by means of BNPL from PastPay. With a strong liquidity position, your customer is now better able to cope with market fluctuations.
• Reduced costs for seller: Seller can expect an immediate settlement of the invoice by PastPay. Without having to offer a discount to buyers for an accelerated refund (as with trade credit).
• Swift credit worthiness check: PastPay examines your client’s creditworthiness so that a valuable insight can be created into its financial position. This check by PastPay can now be realised in a matter of seconds.
• Full integration of the payment process: PastPay’s BNPL payment method is fully integrated into the POS (purchasing) system. This makes a BNPL payment experience as easy as that of a traditional payment method and will increase the number of purchases of the buyer by more than 30%.
• Guidance in the debt collection process: Does the buyer default? Rest assured, PastPay can take care of the entire debt collection process. This allows for significant savings to occur with regards to administration and debtor collection costs.
• Higher shopping cart value: Due to the efficiency and ease of PastPay’s BNPL service into the POS system, customers are likely to spend between 10-40% more on internet purchases.

BNPL B2B Payments or Trade Credit?

In this blog we have explained that many international agreements use trade credit financing. Despite this being a widely used method, there are a number of snags to its use. The most important consideration is that trade credit is especially beneficial for buyers. Sellers are sometimes left out in the cold because there is a risk of default.

The risk of default has consequences for both the buyer and the seller. In this way, the seller generates less liquidity, and the buyer runs the risk that default will compromise its creditworthiness. Therefore, trade financing is often only available to buyers with a solid creditworthiness history.

Especially in the business to business relationship of webshop suppliers and customers, there is an increasing interest in a Buy Now Pay Later solution. With this form of financing, the risk of default for the seller disappears, and buyers can rely on a cheap deferred payments solution.

Additionally, BNPL in B2B is less risky for buyers when it comes to creditworthiness. Also the webshop is free to decide whether they incorporate the costs or charge it on the buyer. In turn, satisfied buyers can generate higher purchase volumes and conversion rates.  

More information about BNPL in B2B? If you want to learn more about PastPay and its BNPL solution, please visit our website for more information.

PastPay’s BNPL versus Trade Credit

‍