Why B2B Financing Is Essential for Improving Small Business Growth

Buy Now Pay Later (BNPL), which was formerly a niche service limited to those with excellent credit histories, has recently become one of the most popular financial solutions. Unlike conventional credit solutions, BNPL gained traction with the introduction of lower ticket sizes and quick approval timelines. The B2B (business to business) BNPL has started expanding with strong financial products for SMEs, even though as of now the majority of BNPL offerings are only available to B2C (business to consumers).

 

The BNPLB2B model is where the seller receives a one-time payment of the entire price of sale from the buyer's financier in exchange for the buyer paying the purchase price in installments over a predetermined period. This in turn leads to an increase in the average order value and conversion rates of sale.

 

SME is always short on time and is busy finding new suppliers or buyers and therefore, can ill afford to spend a lot of time on finding credit providers or curated credit financial products. Thus, all participants—the purchaser, the seller, and the underwriter—in a transaction —stand to gain from this product. The value statement is based on the idea of providing more inclusive credit to India's disadvantaged SMEs.

 

The COVID-19 epidemic, which disrupted how people purchase goods and services, gave a strong push to e-commerce causing an extraordinary boom in online enterprises in both large cities and little communities. According to projections, the Indian e-commerce market would reach $188 billion in 2025, with a CAGR of 25% between 2015 and 2025.

 

The B2B retail market in India is anticipated to grow to +$1trillion by 2025 as more small firms adopt the digital way of doing business. It is hardly surprising that Platforms for B2B payment services have become important agents that help small businesses communicate with their supply chain. Due to the recent inflationary environment, SMEs are putting more emphasis on process optimization, which is changing the B2B payments and lending working dynamics.

 

In the past, invoice discounting products had trouble determining if invoices were legitimate and whether financing mechanisms were fraudulent. The competent authorities are trying to build infrastructure to address these points.

 

The creation of special analytics to address the main issues with invoice-based financing is made possible by the accessibility of public credit registries, verified account aggregators, and GSTN invoicing infrastructure. Using data analytics to give a 360-degree perspective of SME loans enhances overall credit evaluation.

 

Although quick payments based on the Unified Payments Interface (UPI) have increased transparency in how retail consumers pay businesses, they fall short when it comes to B2B invoice-based transactions. The next step in resolving this problem for both sellers and purchasers is the generation of credit-embedded invoices. Purchasing, selling, creating value, and receiving money for items sold are all steps in a normal business cycle.

 

A firm requires working capital finance during this business cycle, which is directly correlated to the cycle's duration. To meet their immediate working capital needs, more than a whopping 93% of SMEs in India must borrow money at exorbitant interest rates from the informal economy. Sadly, this debt becomes a never-ending loan cycle that makes a firm unsustainable more often than not.

 

 

A B2B BNPL solution is ideal for small firms with constrained working capital, cyclical demand, and tighter cash flows.

 

For instance, a small merchant regularly purchases high-end products from a wholesaler or a B2B marketplace once each week. Here, a B2B BNPL product can offer instant credit with a flexible repayment option that is large enough to cover 15 days of inventory. In this method, the supplier is guaranteed payment for their invoices, and the merchant does not struggle to find cash for placing orders.

 

Thus, Companies can manage their cash flows according to the business situation, and pay interest as per usage and at the time of usage.

 

 

By providing credit at the checkout, B2B BNPL provides a smoother sales process and greater conversion rates. User experience is simple and quick and requires minimum clicks. Since user experience is highly valued by B2B clients, the user interface is given particular consideration.

 

This solution includes aspects that prioritize flexibility and reconfigurability to each customer's unique industry and credit demands, as well as offering objective benefits like decreased time and effort

 

Typically, there are two models – closed loop and open loop. A closed loop approach would rate business dealings with a single distributor, supplier, or B2B marketplace to assess the likelihood of default, while an open-loop model may assess the general creditworthiness and payback capacity of the borrower.

 

In the underwriting process, the closed-loop model has the significant benefit of evaluating cash flow-based measures beyond the typical metrics which are based on the balance sheet. The cashflow based underwriting is quite useful as the vast majority of enterprises in India are classified as being in the unorganized sector and are therefore unlikely to have formal banking tie-ups, balance sheets, or structured revenue streams. And these clients are regularly denied access to finance.

 

 

Businesses who might otherwise lack access to working capital and purchase finance now have a level playing field thanks to the B2B BNPL, allowing them to concentrate more on other facets of their operations. With its transaction- and cash flow-based underwriting for small enterprises, the solution is simple to implement.

 

The utilization of various data points, including traditional credit data, open banking, and alternative data to evaluate credit criteria, significantly reduces the risk proposition. By including NTC (new to credit) firms in the credit pool, this solution would ensure credit inclusiveness.