B2B Buy Now Pay Later vs Traditional Trade Credit

Published: 24th April, 2023
Updated 20th Dec, 2023

Trade credit has long been a staple in the B2B space, allowing businesses to purchase goods and services on credit and pay at a later date. According to the World Trade Organisation, as much as 80-90% of all international agreements depend on trade credit. For most of that time, trade credit has worked relatively well. But there are drawbacks to both seller and buyer that can make it a troublesome payment method.‍

For example, offering trade credit can lead to cash flow problems for sellers. Once goods or services have been sold, the seller needs to wait until the end of the payment term. The seller also takes on the credit and fraud risk associated with trade credit.

At best, this means the seller needs to chase overdue payments. At worst, the buyer never pays and the seller has to absorb the cost. Neither outcome leave the seller in a good position.

However, more recently, B2B Buy Now Pay Later (BNPL) has emerged to offer a much needed update to the payment method 80-90% of global trade relies on. Offering sellers upfront payments, increased B2B sales, and the ability to offset credit and fraud risk, B2B BNPL is quickly becoming a preferred financing option for businesses.‍

‍In this article, we will explore the differences between these two methods of financing, as well as some further pros and cons, so you’re able to make the right decision for your business. We'll also be looking at how Two can help your business for a streamlined B2B checkout experience from start to finish.

Let's get into it!

Table of contents

1. What is trade credit?
2. How does trade credit work?
3. Advantages and disadvantages of trade credit
4. What is B2B Buy Now Pay Later?
5. How does B2B BNPL work?
6. The benefits of B2B BNPL

What is trade credit?

Trade credit is a business-to-business financial arrangement where a supplier allows a customer to purchase goods or services and pay for them at a later date. Also known as business credit, purchasing on invoice or net terms, this allows the seller to increase B2B sales whilst the buyer can secure the goods or services then and there.

Sellers typically provide payment terms ranging from 14 to 90 days. Typically offered with no interest, this method of purchasing is hugely beneficial for buyers, improving their purchasing power and giving them greater flexibility over future investments.

‍How does trade credit work?

When you extend B2B trade credit to a buyer, you allow them to purchase goods on credit and settle the payment at a later date. The specific steps involved in setting up trade credit can vary, but typically include:

1. Credit approval: Before extending credit to a customer, it's important to verify their ability to repay the invoice. This may involve assessing their credit history and performing other due diligence. Often, a 3rd party is involved here.

2. Setting credit limit: After a customer is approved for credit, you'll need to determine how much credit to extend based on the information gathered during the credit assessment.

3. Setting payment terms: The terms of the trade credit, including the credit limit and the length of time before payment is due, are usually negotiated between you and the customer. Payment terms of 30, 60, or 90 days are common, after which the seller receives payment.
   

Collecting payment: At the end of the payment term, the seller needs to collect payment from the buyer. The ways in which a seller can do this varies but generally it’s either managed in-house or with the help of a 3rd party.

‍Advantages and disadvantages of trade credit

We covered the advantages and disadvantages of trade credit in a previous article but here’s a quick overview for both sellers and buyers:

Trade credit advantages

Sellers can experience an increase in B2B sales and conversion rates as a result of offering a payment method that suits their buyers. In fact, 55% of all B2B sales are on trade credit in Western Europe.

Additionally, trade credit can help sellers win new customers. For example, in Eastern Europe, 40% of businesses offer trade credit to attract new business. This, of course, can lead to increased customer loyalty by extending trust, improving the chances of them returning.

Buyers can benefit from using trade credit in a couple of ways too. Purchasing goods on credit allows them to produce their product or service, sell it, and make a purchase. All before having to pay for the original goods purchased. 

This makes cash flow much more manageable as buyers have the opportunity to generate a profit and use the money made to settle their debts.

Additionally, trade credit can increase the purchasing power of B2B buyers, allowing them to acquire the resources they need to grow their business. Compared to other financing options for buyers, such as bank loans or credit cards, trade credit is much more affordable.

Trade credit disadvantages

The issue with selling on trade credit however is that it can create issues with cash flow. Sellers need to wait until the end of the payment term to receive payment. And in the meantime, they’re out of pocket.

This is why it’s common for sellers to use access tied up working capital using accounts receivable financing or debt factoring.

Sellers are also forced to take on the credit and fraud risk, making trade credit a risky scenario if the buyer does not pay on time. 

Managing invoices in-house also requires considerable time and effort, resulting in operational complexities for sellers. If you don’t have a dedicated team to deal with this, you’ll find a lot of your time is spent managing invoices, reconciling payments, and organising credit checks.

On the buyers side, missing payments can result in late payment fees that have a detrimental impact on their finances and reputation.

What is B2B Buy Now Pay Later?

B2B Buy Now Pay Later (BNPL) is a payment method that utilises newer technology like embedded finance and automatic payment reconciliation, helping to solve the pain points of traditional trade credit. Buyers can defer payment or divide purchase costs over a certain period while the seller gets paid straight away.

Since B2B BNPL is digital, it's usually offered on e-commerce websites, marketplaces and various online platforms. Nevertheless, the realm of B2B BNPL extends beyond the virtual domain, with tailored products designed for telesales and omnichannel sales gaining prominence in the market.

How does B2B BNPL work?

Offering B2B BNPL is actually a fairly straightforward process (especially with Two!). Check out the video below from Two’s Co-Founder and Strategic Sales Manager Ed Brandler to learn how Two’s B2B BNPL solution works:
‍

The benefits of B2B BNPL

Increased conversion rates

Buyers who don’t use credit cards have to float their working capital by fronting their expenses to make purchases. And the companies who do use credit cards often run into card limits that prevent them from buying what they need. 

But BNPL B2B makes purchases seamless. Buyers no longer need to chase down that one employee with a corporate card or expense business purchases on their own account. This ultimately allows buyers to place larger orders without running into cash flow problems.

Merchants like Glamit, for example, have experienced a +20% uplift in conversion rate after offering BNPL B2B with Two.

Reduced administrative time

Many merchants are simply unable to tap into the demand of purchases by invoice because it requires too much manual work. Managing an invoice payment solution in-house requires specialist staff to organise invoices and stay on top of payments. 

But with BNPL B2B, merchants can simplify operations across multiple departments and save time, making it super easy to stay organised and save multiple hours a week in manual work.

Offset credit and fraud risk

Working with third parties to run credit and ID checks is a necessity if you manage invoice purchases in-house. However, once a buyer is approved, there’s still risk involved. What happens if the buyer doesn’t pay? And how do you know if the ID verification or credit checking process was comprehensive enough? 

Merchants operating with little fraud knowledge are often left exposed, sometimes with dire consequences. BNPL B2B removes that risk. B2B payment providers perform comprehensive credit and fraud checks (or work work with financial partners who perform the assessment themselves) for an uninterrupted buying experience.

For the seller, that means being able to offer net terms without the stress of fraudulent orders.

Improved cash flow

One of the drawbacks of traditional trade credit is that the seller is forced to wait until the end of the invoice term until they receive payment. This can lead to a whole host of cash flow problems for the seller that prevents them from growing their business and expanding. 

To mitigate this, it’s common to resort to invoice factoring, invoice discounting, or bank loans - none of which are an optimal way of growing. But the nature of BNPL B2B means that merchants are paid upfront for their invoices, often with help from financial institutes the B2B payment platforms work with.

Any B2B payment platform worth its salt will also reconcile payments. That means saying goodbye to chasing late payments on a daily basis.

The differences between traditional trade credit and B2B Buy Now Pay Later

In a world where BNPL services are in high demand, specialised providers have stepped in. While traditional trade credit relies on outdated tech, B2B BNPL payments are simplified with digital technology, bringing unparalleled efficiency. 

Although these two financing options have many similarities, there are some key differences that are important to understand. In the table below, you can see some of the main differences but we’ll cover them in more detail too.

1. Upfront payments

One of the drawbacks of traditional trade credit is that the seller is forced to wait until the end of the invoice term until they receive payment. This can lead to a whole host of cash flow problems for the seller that prevents them from growing their business and expanding. 

To mitigate this, it’s common to resort to invoice factoring, invoice discounting, or bank loans - none of which are an optimal way of growing. But the nature of BNPL B2B means that merchants are paid upfront for their invoices, often with help from financial institutes the B2B payment platforms work with.

Any B2B payment platform worth its salt will also reconcile payments. That means saying goodbye to chasing late payments on a daily basis.

✅ Improve your cash flow?
✅ Offer customers credit decisions in seconds?
✅ Automate your invoicing?
✅ Increase customer retention?

Download our free CFO's guide to Buy Now, Pay Later for B2B ebook!

2. Removes risk for merchants

Working with third parties to run credit and ID checks is a necessity if you manage invoice purchases in-house. However, once a buyer is approved, there’s still risk involved. What happens if the buyer doesn’t pay? And how do you know if the ID verification or credit checking process was comprehensive enough? 

Merchants operating with little fraud knowledge are often left exposed, sometimes with dire consequences. BNPL B2B removes that risk. B2B payment providers perform comprehensive credit and fraud checks (or work work with financial partners who perform the assessment themselves) for an uninterrupted buying experience.

For the seller, that means being able to offer net terms without the stress of fraudulent orders.

3. Cuts admin time

Many merchants are simply unable to tap into the demand of purchases by invoice because it requires too much manual work. Managing an invoice payment solution in-house requires specialist staff to organise invoices and stay on top of payments. 

But with BNPL B2B, merchants can simplify operations across multiple departments and save time, making it super easy to stay organised and save multiple hours a week in manual work.

Outside of these unique advantages, B2B BNPL continues to help sellers with increased average order value, conversion rates, and customer retention:

• Increases average order value and conversion rates. Buyers who don’t use credit cards have to float their working capital by fronting their expenses to make purchases. And the companies who do use credit cards often run into card limits that prevent them from buying what they need.
  But BNPL B2B makes purchases seamless. Buyers no longer need to chase down that one employee with a corporate card or expense business purchases on their own account. This ultimately allows buyers to place larger orders without running into cash flow problems while increase B2B sales for the seller.
  For example, our merchants typically see a 60% increase in average order value. That’s certainly not the limit though! The same can be said for conversion rates, with our merchants seeing a 20% uplift after offering BNPL B2B.
  

• Increases customer retention. The issue of a complicated checkout experience for B2B buyers shouldn’t be understated. In fact, 77% of B2B buyers say their latest purchase was either difficult or very complex.
  Loaded with useful features for this very reason, BNPL B2B solves the all too familiar challenges of merchants who want to offer their customers net terms. Offering a BNPL B2B solution that works for your customer ensures (or at the very least increases) your chances of keeping them loyal.

Two - The highest net term credit limits for B2B. Instantly.

Selling B2B with Buy Now, Pay Later can be incredibly complex. But it doesn’t have to be. With Two, you can increase conversion rates and average order value while eliminating admin. 

Whether you want to supercharge your B2B e-commerce checkout for guest purchases, optimise your trade account with frictionless onboarding, or offer B2B BNPL on all sales channels - Two is here to help.

Two’s payment technology enables businesses across all industries to offer purchasing on invoice, providing a frictionless checkout experience with instantly approved credit. Our revolutionary B2B solutions simplify the payment journey so businesses can access working capital and increase B2B sales while reducing time consuming operational work.