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Buy now, pay later for business: is it storing up a debt timebomb?

In this cost-of-doing-business crisis, buy-now-pay-later schemes allow companies to defer payment for goods to ease cash flow. But that might be a dangerous game to play
BNPL debt

It started as a way for consumers to defer spending on big-ticket items, splitting the bill over several pay packets. Now though, buy now, pay later (BNPL) has also become a way for businesses to ease cash-flow issues during these tough economic times.

According to a survey by fintech company Marqeta, 43% of European business leaders have turned to BNPL to cover a business expense in the past three months.

And this is not an aberration. Experts think the market for B2B BNPL will mushroom, in much the same way that it has among consumers. Juniper Research predicts that total BNPL spending will reach $437bn (around £352bn) globally in 2027; up 291% against 2022.

Why are businesses using BNPL?

There are, of course, advantages to using BNPL for business. For one thing, suppliers get paid upfront by the BNPL provider. The trade-off here is that the amount they receive is either discounted or subject to a fee, usually a percentage of the total purchase.

To access this short-term finance, the buyer may be required to put down a small deposit, and they will then have 30, 60 or 90 days – or sometimes longer – to pay the bill in full, direct to the BNPL lender.

While short-term BNPL lending might alleviate some pressures, there are also immediate-term risks and issues it can create

This model’s increasing popularity has prompted many new entrants to the B2B market of late, including the likes of Billie, Mondu and Tranch. However, there are worries – not least that BNPL could be racking up instability for the UK economy.

Ravi Sidhu, an expert in UK&I risk and compliance at business information and research firm Dun & Bradstreet, says its findings show that the increasing cost of doing business is having an acute impact on 37% of UK firms. “While short-term BNPL lending might alleviate some pressures, there are also immediate-term risks and issues it can create,” Sidhu warns.

“The concerns around businesses using BNPL are the same concerns raised in the consumer world in terms of affordability,” he explains. “Without the appropriate reporting to credit rating agencies (CRA) for these kinds of loans, it becomes harder to assess how indebted a small business is.”

Sidhu suggests that less vigorous checking in the BNPL world means that firms could find themselves building up hidden debt. “Typically, CRA loan reporting is updated monthly,” he explains. “So, for example, I could apply for 10 small BNPL loans in one day as a consumer or business owner, but none of this information would be visible until the following month via the CRA.”

One solution here could be for the CRAs to provide updates on businesses’ debt levels more often, with more frequent data-sharing between themselves, regulators and governments, Sidhu suggests.

Is there still more B2B BNPL adoption to come?

Jeff Parker is senior vice-president and international MD at Marqeta. He points to its research, which found that the majority of businesses using BNPL are doing so to buy stock (47%) or tech (45%). This chimes with technology giant Cisco’s recent decision to launch a one-off BNPL offer, such that any customers who purchase before 29 July can defer all payments until 2024.

Even so, Parker suggests that Marqeta’s findings also demonstrate a widespread “lack of awareness” regarding the availability of B2B BNPL, with nearly 30% of businesses across Europe saying they were still unaware of B2B BNPL. If addressed, this “could accelerate adoption”, he argues.

Other perception problems remain too. “A quarter of respondents thought BNPL wasn’t intended for businesses like theirs, and a further 25% felt it was too risky,” Parker adds.

Naturally, risk is also a factor for suppliers, says Krista Griggs, head of banking, financial services and insurance at Fujitsu UK. “The key risk for the industry, and where the regulator will likely pay the most attention, is transparency around affordability. Where affordability isn’t assessed accurately, a company using BNPL may incur unexpected fees if the payment terms cannot be met and the provider increases its risk posture for non-payment.”

Griggs suggests that real-time insights using open banking APIs could play a greater role here, to help suppliers better assess creditworthiness. Stricter credit checks or underwriting standards may need to be used too. After all, the risk that BNPL providers face has already been shown in the consumer sphere, with Klarna announcing a $1bn operating loss in 2022.

Can full visibility help make B2B BNPL more viable?

Despite concerns about the risks on either side, Louis Carbonnier, co-founder of B2B BNPL provider Hokodo, maintains that the model is “simply a modern way of providing trade credit”. This is “how businesses have transacted for centuries”, he says.

The key risk for the industry is transparency around affordability

Carbonnier explains that as more B2B commerce has moved online, “risk and complexity” have prevented sellers from offering such trade credit, “particularly to the SMEs that need it most”. Companies like his solve this issue, he suggests, as “sellers no longer have to take on the risk or offer credit from their own books.”

He also argues that the risks aren’t the same as with consumers, who might “buy more than they need” or “purchase something they can’t afford”. “A business is not likely to do this,” he explains. “Why would a construction company buy more materials than they need to finish a job?”

The lower barriers to entry with B2B BNPL are one reason why many companies see it as a better option than loading debt onto costly credit cards. Late payment fees are, though, an obvious financial risk.

Nick Maynard, vice-president of fintech market research at Juniper Research, suggests that CFOs must have full visibility over their company’s BNPL use, particularly given that it is not a well-established B2B payment type and is not as well integrated into B2B purchasing platforms. “As such, CFOs need to ensure that where BNPL arrangements are used, they are used in a way that is in line with defined company policies,” he advises.

So, is B2B BNPL worth the risk?

Daniel Meyer, financial services regulatory lawyer at Freeths, also notes that BNPL has not always been the cleanest of sectors. The FCA has previously issued warnings about misleading advertising by lenders and unfair terms in their contracts.

He adds that the majority of the “newer B2B BNPL credit products aimed at the SME market” will likely stay outside FCA regulation for now. That includes “all solutions that provide credit to limited companies”.

Meyer explains that for an SME-sized supplier, one or two defaults in the current climate “could cripple the business”. “But, by receiving immediate payment from a BNPL provider, while still being able to offer flexible payment terms to the businesses they transact with, the transfer of credit risk may well be worth the discount on the price the business receives,” he concedes.

The BNPL model could also offer an “essential lifeline to help with liquidity issues” for buyers, but Meyer warns that suppliers must be careful before adopting this. “First, businesses need to be sure the discounted price they receive is sustainable,” he says. “Then, they should check the discounted price they receive against other options, such as more traditional trade credit and financing options, to make sure the business is getting the best deal.”

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