Providing financing as part of a trade credit offering is important for B2B companies looking to drive sales and increase customer loyalty. At Hokodo, we’ve seen that offering financing to buyers results in improved conversion rates (+40%), higher average order value (+30%) and increased purchase frequency (+24%). But financing buyers off your own balance sheet can be risky and lead to cash flow issues.
In the fourth webinar of our ongoing series, Lucy Heavens, VP of Marketing at Hokodo and Sania Kudaibergen, our VP of Operations, analyse the ins and outs of financing and how it is at the heart of a successful end-to-end digital trade credit solution. The team’s in depth conversation provided expert insights that we have summarised for your convenience.
What is financing?
The financing element of a Digital Trade Credit solution is what enables buyers to defer payment by 30, 60 or 90 days, while sellers receive their payment up front.
“It's essentially a form of credit that we extend to buyers, enabling them to improve their cash flow by being able to delay when they pay the seller or the merchant,” Sania explains.
On the merchant side, Hokodo pays out the full order value upon delivery of the goods, withholding a small fee that we charge for the financing provided to the merchant.
“It's really both sides, the merchant and the buyer, that benefit from financing and are able to improve their cash flow,” Sania explains.
Hokodo is able to make this possible because of our access to a financing fund. In a typical B2B transaction where trade credit is offered directly from the seller, the buyer’s cash flow would improve but the seller would be out of pocket. Because Hokodo has access to a financing fund, we are able to extend credit to the buyers, allowing them to pay later, while paying the merchant up front.
Finding the perfect payout schedule
Hokodo has many different payout options for merchants. The most simple option, and the one chosen by most of our merchant partners, is to receive funds on a weekly basis. This means that within three or four days of delivery, the merchant will receive payment in full – a significantly shorter wait than if they were offering 30 or 60 day payment terms themselves. But that’s not the only option for merchants.
“There's a lot of customisability for the merchant. For example, they can choose whether they want to be paid out in gross or net,” Sania explains.
Hokodo gives options for merchants to schedule payouts in the way most convenient for them, whether that’s multiple times a week or on a specific day. This can benefit larger merchants that have a lot of cash on hand. They can choose to be paid once per month in order to reduce the number of bank transfers that they receive. On the other hand, Hokodo’s ability to provide several payouts per week can benefit small to medium-sized enterprises (SMEs) who need help easing cash flow issues.
Balancing automation with human elements
Hokodo has automated the majority of the purchasing process. When a buyer chooses to pay later, there are two automated checks. One is to check the buyer's credit eligibility and the other is a fraud check. On rare occasions, the fraud check will flag a legitimate transaction, triggering a manual review of the transaction. Security is a very high priority of Hokodo and it is important to make sure that no fraudulent activity is occurring. Automated and manual fraud checks help us to protect against risk while ensuring as many buyers as possible receive financing.
Most payments are automated through Hokodo’s API which connects to payment service providers. Sometimes payments need to be made manually, for instance if there is a dispute between the merchant and the buyer. In these scenarios, it is valuable to have a member of the Hokodo team on hand to assist if a problem arises. Once again, the combination of automated and manual processes enables us to provide the best possible service.
Whenever an order is made, Hokodo keeps both the buyer and the merchant up to date from the purchase through to collection of payment. We send a series of automated emails to the buyer, including order confirmation messages and payment reminders. On the merchant side, we send documents to them through our API and they are able to track details related to the orders. If any questions or issues arise the Hokodo team is on hand to help.
To learn more about financing, watch the full webinar here.