What is B2B finance and how does it work?
B2B finance, also known as business-to-business finance, is the common practice of providing financing options to other businesses. This can include traditional service options like loans, instalment payment plans, and trade credit. Beyond the traditional options, there are several alternative financing options to consider, including PayLater solutions like B2B BNPL, invoice financing, and debt factoring.
For many businesses, B2B finance is critical to managing their financial needs (and those of their buyers) while facilitating growth. It’s needed for a variety of reasons in B2B, but the following are typical drivers:
- Managing cash flow
- Growing sales revenue
- Funding for payroll
- Investment in technology
- Insurance for Inventory
In this article we’ll cover the different options and how making the right choice can lead to significant growth and minimise risk. We’ll look at the fundamental benefits of B2B finance, the various financing options available, successful applications demonstrated through case studies, and tips for implementing effective B2B finance strategies.
Key Considerations of B2B Financing
Understanding the fundamentals of B2B finance enables businesses to make sound decisions and navigate the financial landscape effectively.
Credit management
Businesses often rely on credit to facilitate transactions with other businesses. Effective credit management involves assessing the creditworthiness of potential partners, setting spending limits, and monitoring payment behaviours to mitigate the risk of late or non-payments.
Creditworthiness Assessment: Before extending credit, lenders will need to evaluate the financial stability of potential partners. This involves analysing their credit history, financial statements, and other relevant data to assess their ability to meet payment obligations. Tools such as credit scoring models and financial health indicators are commonly used to make informed decisions.
Setting Credit Limits: Determining the appropriate amount of credit to extend is a critical decision that balances risk and reward. Spending limits should be based on the customer's creditworthiness, historical payment behaviour, and the overall exposure the business is willing to accept.
Speed of Financing
Another crucial factor to consider is the speed at which financing can be secured., The time it takes for financing to be granted can significantly impact a company's ability to capitalise on new opportunities or manage sudden financial shortfalls. When evaluating financing options, it's important to consider:
Application Process: How long does the application process take? Is it a streamlined, digital-first approach, or does it involve cumbersome paperwork and manual interventions?
Approval Time: After application submission, how quickly are decisions made? Some modern financiers can offer decisions within hours or a day, thanks to advanced algorithms and data analytics.
Disbursement Speed: Once approved, how quickly are the funds available? Immediate access to funds can be a game-changer for businesses needing to act fast.
Flexibility
Flexibility in financing is equally important. The ability to adapt financing to a company's specific needs can provide a competitive edge. This includes how easily a business can access additional funds, repay early, or adjust terms based on changing business conditions.
Key considerations include:
Ease of Use: How straightforward is it to leverage the finance option? Can funds be accessed on-demand, or is there a fixed schedule or milestones that must be met?
Scalability: Can the amount of financing grow as the business grows or as needs expand? This is crucial for businesses that are scaling up and require progressively larger financing.
Adaptability: How well can the financing terms be adjusted over time? This could involve the ability to change repayment schedules, take payment holidays, or renegotiate interest rates based on business performance or economic conditions.
Types of B2B Financing
When it comes to B2B financing, businesses have a plethora of options to choose from. These options are designed to cater to different financial needs, risk tolerances, and business models. Let's take a closer look at some common types of B2B financing options:
1. Flexible payment terms (PayLater)
Providing buyers with flexible ways to defer payment helps convert buyers by removing the friction from purchase decisions. Covered by a range of terms from digital trade credit to buy now, pay later (BNPL), these solutions provide buyers with the flexibility to defer payment whilst immediately accessing goods or services.
This is the preferred finance option for businesses looking to proactively build a finance strategy that minimises cash flow issues from the start, rather than fixing problems later.
At Kriya, we’ve developed a product for this exact use-case; a seamless PayLater experience for customers, with full upfront payment provided from Kriya to the merchant and flexible payment terms for the buyer. For businesses looking for a frictionless buyer experience, instant credit checks & decisions, reputable funding sources, and an easy to manage payment portal, get in touch today.
2. Invoice Financing
This option allows businesses to sell their outstanding invoices to a third-party finance provider in exchange for immediate cash. You receive instant funds while you wait for your customers to make their payments. Many businesses use invoice financing to address cash flow gaps as they arise.
3. Trade Credit
Trade credit is another traditional financing option, whereby suppliers extend credit to customers, allowing them to make purchases on net payment terms. It's a common form of B2B finance that not only helps businesses increase sales, but also builds strong relationships with buyers. However, many businesses fund this credit using cash off their own balance sheet, or partner with a traditional financial institution. This can lead to putting business cash at risk, or being beholden to an inflexible lending partner. Another downside to trade credit is that the merchant needs to wait for the balance to be paid by the buyer before receiving revenue from the sale.
4. Asset-Based Lending
This type of financing involves securing a loan using your business's assets as collateral. Whether it's inventory, equipment, or real estate, you can leverage your assets to access the funds you need. It's like having a financial safety net that allows you to tap into the value of your assets.
5. Bank Loans
With a bank loan, you get a lump sum amount that you need to repay over an agreed period, typically with interest. While bank loans are a tried and tested route to finance, they come with highly involved application processes and strict regulatory requirements. Funding decisions can also take some time to be provided.
6. Equity Financing
For businesses in need of a substantial capital injection, equity financing might be the way to go. It involves selling a portion of your business to investors in exchange for funding. Whilst the other types of financing are advantageous in the way you will retain ownership of your business, a large proportion of start ups and scale-ups will typically leverage equity financing due to low assets & high setup or development costs.
By understanding the different types of B2B financing options available, businesses can make informed decisions and choose the most suitable option based on their specific circumstances and financial goals. So, whether you're looking to bridge cash flow gaps, build supplier relationships, leverage your assets, rely on traditional bank loans, or seek substantial capital through equity financing, there's a B2B financing option out there waiting to help you thrive.
How Payments Has Changed the way Innovative Businesses Think About B2B Finance
Payment processing represents a frequently overlooked opportunity for businesses looking to address their financing needs. The traditional solutions are firmly part of the status quo which means they are routinely sought when cash flow issues arise. But are they the right choices?
At Kriya, we believe that PayLater is a superior solution to the problems that traditional financing options aim to solve, and that by implementing this proactive solution, businesses can maintain stability and focus on growth rather than simply surviving the next crisis.
PayLater enables businesses to get paid upfront, while offering buyers flexible payment terms across all sales channels. This solves the cash flow problem at the source while also eliminating the need for expensive and time-consuming financing options such as bank loans, invoice financing, and traditional trade credit.
Not only does PayLater help fix the cash flow problems, but the buyer experience improvements drive real business growth. Our customers see a 68% increase in average order value, and 82% increase in likelihood to convert and a 2x increase in repeat purchases.
Case Studies: Successful Applications of Payments as a B2B Finance Solution
Examining real-life case studies can provide valuable insights into how payments have been successfully utilised as a B2B finance method. Let's explore a few examples:
Case Study 1: Wholesaler Turned B2B Marketplace, Meatex
Meatex started off as a traditional meat and fish wholesaler until they saw an opportunity to connect even more suppliers and buyers by becoming an online B2B marketplace. They capitalised on a way to differentiate through superior customer experiences by digitising their operations. Breaking away from the old-fashioned ways of the industry, Meatex embraced technology, making it as easy as possible for customers to buy from them.
The majority of Meatex’s sales happen offline, facilitated via phone and email by their team. Knowing the importance of flexible payment terms, they offered most of their buyers the typical industry payment terms of 28 days - with this fluctuating based on the customer relationship. This approach came with challenges around credit checking, credit limits due to limited capital & prohibitive administrative effort.
Our PayLater product was the right solution. Meatex was able to offer customers 30 and 60 days credit instantly without them ever having to leave the Meatex site.
Case Study 2: B2B Diamond Marketplace, Nivoda
In early 2022, Nivoda were providing 30 day payment terms to some of their customers via a trade credit insurance provider, but that option came with limited coverage and high interest for terms longer than 30 days. For the suppliers on Nivoda’s platform, they usually got paid after 2-3 weeks which presented cash flow challenges for those businesses.
Nivoda were looking for a sustainable, long-term credit solution, and were deciding whether to raise facilities on their balance sheet or partner with an embedded finance partner such as Kriya. Building custom solutions however, is a challenging and resource-heavy undertaking and Nivoda decided that partnering with Kriya was the way to go.
Since partnering with Kriya, Nivoda has seen a monthly average 14.6% increase in orders and quarterly 24% increase in customer numbers. Additionally their existing customers spend 11% more quarter on quarter. Not only are the cash flow problems, but PayLater is driving real business growth.
Read more about this case study
Case Study 3: Leading Manufacturing Platform, Fractory
Fractory recognised a clear need for B2B payments, with 50% of buyers expecting extended payment terms. However, funding these credit options came with significant risk, intensive capital requirements, and high administrative costs. Launching PayLater solutions resolved all of these issues, with the team particularly impressed by Kriya's automated credit assessments.
With Kriya, buyers can choose to pay at the end of the following month, giving them the working capital to fund their orders... When a customer registers with Fractory they’re assigned their spending limit. There are obvious benefits for the marketplace, but what’s great for the buyer is that they have a full understanding of their options when they get to the checkout, no need to apply and wait around. And if their spending limit isn’t enough to cover the full order they can prepay for a portion of it. They saw 30% of buyer adoption within just 3 months of launching.
Read more about this case study
Conclusion
B2B finance serves as a vital component of businesses' financial operations. It allows them to access the necessary funds, manage risks, and drive growth. By understanding the basics of B2B finance, exploring available financing options, learning from successful case studies, and implementing effective strategies, businesses can thrive in today's dynamic business landscape.
We believe - and have the data to prove - that by adopting innovative payment solutions like PayLater, businesses can transform their financial management from a reactive to a proactive strategy. This not only helps in smoothing out cash flow issues but also boosts overall business growth by enhancing customer experience and loyalty. As we move forward, the ability to adapt to such financial innovations will be a defining trait of successful, forward-thinking companies.
If you’d like to discuss PayLater and how it can help your business, get in touch.
