Business Loans vs B2B BNPL

Hokodo

It’s reported that almost 60% of small businesses suffer from cash flow issues, which makes routine payments and overheads difficult and leaves them grappling with financial uncertainty. In an ongoing blog series, we are taking a deep dive into the different financing options on offer to businesses and pitting them against B2B Buy Now, Pay Later (BNPL).

A business loan is a type of financing provided by a bank, credit union or alternative lender to help businesses meet their financial and operational needs. Business loans are one of the most common ways for companies to secure the funds they need to grow, purchase equipment or inventory, hire staff and more. Business loans come in all shapes and sizes. They are not usually tied to invoice payments and can be used to grow your company.

Meanwhile, B2B BNPL is a form of alternative financing that empowers sellers to offer flexible payment terms to buyers while easing their own working capital pressures. B2B Buy Now, Pay Later is like having your cake and eating it – you get full payment upfront, while your customer settles the bill at a later date once they’ve started making profits.

Please be aware that while this guide is intended to be helpful, it is not financial advice. 

B2B BNPL vs business loans: an overview

The table below shows an overview of how B2B Buy Now, Pay Later stacks up against business loans.

Business Loans B2B BNPL
Get invoices paid faster
Improve day-to-day cash flow
Grow your business with more capital
Offer more choice to buyers
Draw down financing as needed
Grow your customer base without taking on risk

Let’s dive in and learn more about business loans and B2B Buy Now, Pay Later.

What is a business loan?

Business loans are for business owners looking to borrow money for a fixed period of time – otherwise known as a term. Just like other kinds of loans – such as a mortgage or car finance – the business will need to repay a set amount each month. The repayment usually includes interest (fixed or variable), as well as the initial capital. 

Business owners can use loans to grow their business, invest in new equipment or whatever else they need. Because of this, the loans can be much bigger than other types of finance.  

There are many different types of loans available. You can go down the traditional route and apply with a high street bank. Or you could head to an online lending platform and choose from peer-to-peer, regulated or unregulated lenders. Each option has different pros and cons, so make sure you carefully analyse each option before plunging in. 

Business loans are sometimes referred to as:

  • SME loan 
  • Business term loan 

What are the advantages of business loans?

There are several benefits of business loans that make them a popular B2B financing choice. Key advantages include:

1. Access to greater funding

Business loans provide a source of funding that is often significantly larger than if they were to use invoice factoring, revenue-based financing, supply chain financing or another form of B2B finance.

2. Achieving growth goals

With additional funding, businesses can seize growth opportunities that might otherwise be out of reach. This could include expanding into new markets, launching new products or services, or scaling operations.

3. It’s accessible to all

Even start-up and seed companies who do not yet have revenue can apply for business term loans, enabling them to start building a credit rating.

4. Cash flow management

Loans help businesses manage cash flow fluctuations by providing a cushion during times of slow sales or unexpected expenses. This ensures that operational needs are met without disrupting day-to-day activities.

5. Fixed repayments

Often, business loans come with a fixed repayment schedule, which allows businesses to plan and budget for repayments. Such predictability can help with financial planning and forecasting.

6. Improved credit rating

Consistent, timely repayment can help improve a company's credit history and credit score. A strong credit profile can lead to better borrowing terms and more favourable rates in the future.

What are the disadvantages of business loans?  

As with all types of B2B financing, business loans have a number of drawbacks to consider.

1. Paperwork and preparation

The process of applying for a business loan can be time-consuming and require significant documentation, including financial statements, business plans and more. Approval is not guaranteed and might involve a waiting period.

2. Credit checks

The application process will involve a credit check against your business. If you have a poor credit history, you’re likely to experience higher interest rates and stricter terms or not be eligible for a loan at all.

3. Interest rates

One of the primary disadvantages of business loans is the cost of interest. Borrowing money comes with the obligation to repay not only the principal amount but also the interest, which can increase the overall cost of the loan. Interest rates are usually high, and so depending on your credit score you could be paying a lot more for your loan than you anticipated. 

4. Fixed repayments

If the business's revenue doesn't meet expectations or if unexpected expenses arise, it might be challenging to meet the repayment schedule. Paying back a fixed amount each month may also be difficult for seasonal businesses without a steady revenue flow.

5. Collateral requirements

Business loans are usually secured with an asset, such as property or a piece of equipment, which can be seized by the lender if the loan is not repaid. This poses a risk to the business, especially if the collateral is a critical asset for operations.

6. Debt obligation

Taking on a business loan creates a legal obligation to repay the borrowed amount according to the terms and schedule agreed upon. Failure to meet these obligations can result in financial penalties, damage to your credit profile and legal consequences.

7. Limited Flexibility

Loan funds are typically dedicated to the specific purpose outlined in the loan agreement, so businesses might have limited flexibility to allocate funds for other purposes or investments.

What type of business could benefit from a business loan? 

The types of businesses that might benefit most from a business loan include:

  • Seed and start-up companies that do not have revenue yet, but need funds to grow. 
  • Companies with a good credit score that are looking for capital to scale up. 
  • Companies that can comfortably afford to make the monthly repayments. 

What type of business is not a good match? 

Conversely, there are some businesses that might be better off considering other forms of B2B financing. They include:

  • Companies with poor credit scores. This is because lower credit scores generally mean higher interest. Businesses with bad credit scores could be paying back significantly more, exacerbating cash flow problems. 
  • Sole traders, as there is usually a requirement for companies to be limited when taking out business loans. 
  • Businesses that already have outstanding invoices or need the money quickly. Bank loans (and the paperwork required) could take too long while online lenders may have extremely high interest. 

What is B2B BNPL? 

You’ve probably come across Buy Now, Pay Later before. When shopping online, customers now often have the choice to defer payment by 30 days or break their purchase down into several monthly instalments. Providers like Klarna, Clearpay and even Apple enable the customer to delay payment, while the merchant receives funds upfront and in full (minus a small fee).

Despite its recent popularity, this is not a new payment method. Sellers of furniture and kitchen appliances have offered services like these for years. Similarly, B2B trade has relied on trade credit for decades, which works on the same principle of deferring payment.

But the technology facilitating it is what is new. It’s part of a wider trend called “embedded finance”, and it has been ground-breaking for digital marketplaces and e-commerce sellers.

Now, BNPL has begun to enter the world of B2B. With the click of a button at the checkout, buyers get their preferred terms while sellers get paid instantly. It’s similar to invoice factoring, but much faster. 

What are the advantages of B2B BNPL? 

Some of the core benefits of B2B Buy Now, Pay Later include:

1. Payment upfront and in full

Sellers receive full payment upon delivery of the goods, which significantly improves any cash flow issues. This enables you to redirect time, money and resources to reaching growth goals.

2. You keep the full payment, even if your buyer defaults

With solutions like Hokodo’s, suppliers receive and keep the full amount of the invoice, even if the buyer defaults.

3. Buyers benefit from generous payment terms

BNPL solutions don’t just benefit you – they also empower you to offer better payment terms to your buyers. This leads to better conversions and enhanced customer loyalty.

4. It saves time and resources

B2B BNPL brings the full trade credit management process under one umbrella. It saves you the time and resources associated with fraud checks, credit scoring, financing, insurance, payment processing and collections.

5. It can be integrated into your checkout

B2B BNPL platforms offer plug-ins and integrations that make onboarding a breeze. Buyers get a smooth checkout experience and you don’t have to deal with any of the admin of selling your invoices to a factor.

6. The B2B BNPL provider takes responsibility for risk

Which means you are fully protected against credit and fraud risks.

7. No need to put up collateral

Unlike a business loan, you won’t be required to put up any form of collateral or security in order to benefit from B2B BNPL.

What are the disadvantages of B2B BNPL? 

On the other hand, there are a small number of potential disadvantages to consider:

1. It might not be ideal for sellers without an online checkout*

You may not have an online platform, or your buyers may prefer to pay via traditional invoices. *This can be a challenge with some providers, but Hokodo’s solutions can be integrated into offline sales journeys.

2. Your buyers will deal directly with a third party lender

The B2B BNPL provider you partner with will be responsible for collecting payment and contacting your buyers. If handled incorrectly, this could impact the business relationship. 

3. The fees

Like with business loans and many other financing types, there is a cost. The pricing model varies from supplier to supplier. With Hokodo, you pay a small % of the value of each order that is paid for with BNPL. 

What type of business could benefit from B2B BNPL?

B2B BNPL can benefit a variety of business types including:

  • E-commerce sites, marketplaces or other platforms where suppliers sell online. 
  • Business with online and/or offline sales that want to harmonise their payment processes across channels.
  • Businesses that want to offer trade credit in an online setting.
  • Businesses which need invoices paid quickly for cash flow but want to offer competitive payment terms to buyers.

Manchester-based wholesaler Shonn Brothers is just one seller reaping the benefits of a B2B Buy Now, Pay Later solution. 

“Hokodo has provided an innovative and revolutionary experience for our wholesale and trade customers giving them the opportunity to Buy Now, Pay Later,” explains Daniel Shonn, Director. “It is an interesting proposition with great sales potential.”

What type of business is not a good match?

There are a small number of scenarios where B2B BNPL might not be the right fit. These include:

  • Businesses that do not have an online platform and are not able to embrace a digital solution for offline transactions.
  • Businesses offering bespoke services that require manual invoices.

Supply chain finance vs B2B BNPL: which is right for you?

If you are a B2B merchant or marketplace making online or offline sales, BNPL might be a great option for you and your buyers. You receive payment upfront and are protected against fraud and credit risks, while your buyers get to defer payment to a more convenient date. Ensure that you’re happy with the lender who might be dealing directly with your clients. 

A business loan could be a good option if you need capital to grow, but do not have many outstanding or open invoices. As you shop around, pay close attention to the interest rates and terms. 

Download our ultimate guide to learn more about your options when it comes to B2B financing.

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