Finezza Blog – Our Thoughts on Simplifying Lending Lending Lifecycle Management and Fintech in India

How Buy Now Pay Later in B2B Transactions Is Unlocking SME Growth

In the business-to-business (B2B) world, it often seems like big companies have all the advantages. They have more resources, more customers, and more experience. But in recent years, a new trend has emerged, giving smaller businesses a chance to compete: buy now, pay later (BNPL) in B2B.

From Amazon to Afterpay, this type of payment option has taken the retail world by storm. Now, it’s making its way into the B2B space, and more and more small-to-medium enterprises (SMEs) are taking advantage of it. Small businesses are using BNPL to unlock growth and level the playing field against their larger competitors.

So what is buy now pay later (BNPL) and how can it benefit your business? Let’s take a closer look.

Buy Now Pay Later in B2B

Buy now pay later (BNPL) is a type of financing that allows businesses to purchase goods and services when they want, and pay for them later. This can be done in several ways, but the most common model is through instalments. With this type of BNPL, businesses receive the goods or services upfront and then make regular payments until the full amount is paid off.

Initially designed for consumers, this facility is becoming increasingly popular in the B2B space. More and more businesses are using BNPL to pay for everything from office supplies to marketing services. This new payment option is giving SMEs the flexibility they need to grow. With zero per cent EMI schemes, small businesses can make large purchases without putting any strain on their cash flow.

Small businesses are the backbone of the Indian economy, and play a pivotal role in the country’s growth story. They form an integral part of the unorganised sector, contributing 30% of India’s GDP.

How B2B Buy Now Pay Later is Bringing Massive Transformation in SMEs

While big businesses can avail of loans from banks and financial institutions, small businesses find it challenging to get financing at affordable rates. This is where B2B buy now pay later comes in. Here is how the B2B buy now pay later is transforming the SME landscape in India:

1. Easy Access To Working Capital

The biggest challenge for SMEs is access to working capital. They often have to resort to personal savings or take out high-interest loans to finance their business operations. B2B buy now pay later provides them with an easy and affordable way to get working capital.

Also, they can use this facility to buy raw materials or finance inventory and pay later in EMIs. This gives them much-needed financial support and helps them save on interest payments. The unrestricted access to working capital encourages them to invest more in their business and drives growth.

2. Improves Sellers’ Average Order Values

Earlier, small businesses could only offer their products and services on a cash or credit basis. However, with BNPL in place, they can now offer their customers the option to pay later. The seller gets paid upfront while the customer pays in instalments.

This not only helps sellers increase their average order value but also improves customer satisfaction as they are not required to pay the full amount upfront. As a result, small businesses can win more customers and grow their business.

3. Cost-Effective Model

The traditional lending model is quite expensive for small businesses as they have to pay high-interest rates. On the other hand, B2B buy now pay later is a cost-effective financing solution as it offers zero per cent EMI schemes.

Moreover, missed or late payments with credit cards can attract huge penalties, further increasing the cost. In contrast, BNPL providers only charge a nominal fee on late payments. This makes it an affordable and viable option for small businesses.

4. Helps Businesses Go Digital

Since the COVID-19 pandemic, there has been a significant increase in the number of businesses going online. According to Goldman Sachs, consumer demand will propel the Indian e-commerce economy to a $99 billion market by 2024. B2B buy now pay later is helping small businesses make this transition by financing their e-commerce operations.

From website development to online marketing, small businesses can use BNPL to pay for all their digital needs and grow their online presence. This will not only help them reach out to a wider audience but also tap into new markets and generate more revenue.

What’s Next for B2B Buy Now Pay Later

The B2B buy now pay later market in India is still nascent. However, with the growth of e-commerce and the rise of small businesses, it is expected to grow exponentially in the coming years. Regulators and the government are working hard to set up the proper infrastructure for recovering late payments.

The increasing awareness about BNPL among small businesses is expected to drive the growth of this market in India. In the coming years, we can expect to see more small businesses using B2B buy now, pay later to finance their operations and unlock growth.

B2B buy now pay later plan is a game-changer for SMEs in India. It is unlocking growth by providing much-needed working capital, which in turn is driving up revenue and profits. By making it easier for SMEs to do business, BNPL is fostering an environment of entrepreneurship and innovation, benefiting the whole economy.

If you are a small business looking to stream your overall lending procedure. Use Finezza, a cloud-based lending solution that will help you manage credit applications and smoothes the entire KYC process for easy onboarding of your customers.

Contact now to implement a customer-centric lending solution for your business financing needs!

Is B2B Buy Now Pay Later Really Changing the Game for SMEs?

Loan Origination System

Small and medium-sized enterprises (SMEs) have always struggled with the traditional banking system, and their lack of credit history and low credit scores have been tagged as high-risk borrowers.

A report in June 2019 by the U K Sinha Committee involving the Reserve Bank of India (RBI) noted that the credit gap in the micro, small and medium enterprises sector is estimated to sit at Rs 25.8 trillion.

These financial cracks only widened with the global Covid-19 pandemic. But it also paved the way for a more convenient method to bridge the gap; the Buy Now Pay Later or BNPL payment solution.

Buy Now Pay Later In B2B Market

“Buy now, pay later.” This term has become mainstream over the past few years. It has become an economic trend, and for good reasons. With BNPL, access to credit has never been easier. The transaction system allows consumers to buy products at zero percent EMI spread over 30-90 days. Thus you can make purchases without having to pay upfront.

One of the reasons for the rapid growth of this sector can be attributed to widespread low-cost internet and smartphone penetration. BNPL offers a convenient and affordable credit solution for younger consumers who often have difficulty getting loans from traditional lenders. The global BNPL market is projected to grow rapidly over the next several years, reaching a total value of $656.34 billion by 2026.

With UPI completely disrupting Person to Person (P2P) and Person to Merchant (P2M) transactions, there is a need to introduce innovative solutions that are particularly relevant to B2B transactions. Making credit available in digital transactions and invoices is the next logical step in solving the B2B financing puzzle.

How Does BNPL Benefit SMEs?

Small businesses play a significant role in India’s economy, contributing nearly one-third of our GDP. However, most businesses without formal credit don’t have access to the same opportunities. Many institutional lenders see small businesses as high-risk borrowers as SMEs don’t have as much money or assets to fall back on, so they’re often stranded. Here’s how BNPL can help small and medium enterprises:

1. Solves Budget Crunch

Small business companies need to buy raw materials to manufacture products. In a BNPL model, the financial intermediaries are responsible for paying off the upfront payment of the total selling price on behalf of the buyers. The buyer can pay off the purchasing amount over a predetermined period of time via instalments to its financier.

Naturally, this simple framework is helpful for small businesses facing budget constraints. They can choose to purchase the necessary equipment to keep their business running even if they don’t have unrestricted cash flow. Moreover, as small businesses increasingly focus on cutting costs through process optimisation, BNPL is becoming increasingly important.

2. Higher Conversion Rates

The frictionless sales process ensures a better user experience. The ease of this digital transaction method is sure to make business smoother. In addition, this entire procedure effectively increases the seller’s average order value and the SME’s value proposition and ultimately increases conversion rates.

3. Cost Effective

Choosing the BNPL model is more affordable than their old-school model – credit cards. There are no extra costs associated with the GST, cash advance or annual maintenance fee. Moreover, BNPL is an effective way to reduce the costs of missed payments. The interest rate on missed payments can be as high as 48% with credit cards. This means that if you miss a payment, your interest rate can be significantly higher than if you had made the payment on time. For the BNPL service, the interest rate remains between 0-24%.

BNPL has a fixed repayment schedule, but you don’t need to have any collateral to access the service. The lending procedure is quick and thus saves up lots of time. Lower eligibility criteria ensures that a wide range of businesses can opt for this scheme.

Wrapping Up

The Buy Now Pay Later model can prove to be revolutionary for the B2B market for small and medium-sized businesses. The flexible supply chain financing solution can help small businesses in need of substantial capital without a prior credit history. Buy Now Pay Later has already become popular as an alternative to traditional credit, and it’s significantly impacting business transactions.

Finezza is a cloud-based lending solution designed for a hassle-free loan lifecycle. It offers streamlined management of credit applications and processes KYC documents faster for a smoother lending process.

Do you want to implement smooth and efficient processes for your financing needs? Contact us today!

Invoice Factoring – How It Is Becoming the Next Big Frontier for Lending Companies

Lending Lifecycle Management

It is usual for any business to have a long gap between closing the sale and the actual cash flow. Credit sales are necessary for enterprises to increase sales and build customer relationships.

However, it can lead to inadequate cash for working capital and the growth of the business. One way to overcome this situation is through invoice factoring.

In this article, we will provide information about invoice factoring, how it works, and why it is becoming a frontier for lending companies.

What is Invoice Factoring?

Invoice factoring is a business financing option that allows the business to finance slow-paying accounts and meet short-term liquidity needs. In this process, a finance provider (or factor) pays the supplier an initial amount ( 80-90%) of the outstanding invoice and takes on responsibility for pursuing the debtor for the collection of debt.

After the invoice is settled in full, the factor passes on the remaining money to the business, minus a small fee for the services provided by the factor. The cash collected by the company helps in avoiding credit and cash flow problems.

It is also known as ‘invoice discounting,’ ‘debt factoring,’ or ‘accounts receivable financing’ (and sometimes just ‘factoring’). It is easier than a traditional bank loan for a business to raise funds.

Invoice factoring is one of the non-banking funding sources which fills the immediate need for capital for new businesses or businesses without a long track record.

Lenders in this segment accept invoice factoring applications from different businesses considering the current sales volume and the growth potential as a means to approve financing.

Benefits of Invoice Factoring for Lending Companies

Invoice factoring is advantageous to lending companies because the money that they supply to a business is backed by the collateral of the invoice. Suppose the customers of the business pay their bills on time. In that case, the cost of recovery goes down significantly for the lenders, and they can enjoy a better profit margin while collecting payments from the customers.

The lenders simply need to wait out the time period for payments by the buyer to complete the transaction and make a decent profit in the process (with the only exception being the case in which the buyer fails to make payments on time; in such a scenario, the lending company will use its resources to recover the cash).

Benefits of Invoice Factoring for the (Supplier) Businesses

Easy Availability of Cash

An invoice factoring arrangement provides the company with quick access to working capital. This can reduce the risk of missing important payments such as payroll or supplier invoices and increase credibility.

It is extremely difficult for businesses to wait on payments from slow-paying customers, especially if they make up a large part of the company’s balance. Invoice factoring can provide a sense of regularity to the collections process and reduce problems caused by late-paying customers.

Lower Risk of Bad Debts

Businesses that don’t have the resources to recover missed payments from their buyers/clients may end up with bad debts. With the secure option of Invoice Factoring and an accountable third party (lending companies), businesses can avoid this risk and expand operations by bringing in new clients.

Ideal for Seasonal Businesses

Invoice factoring is best suited for businesses that primarily deal in seasons rather than whole-year around. Outstanding invoices can be used to quickly obtain funding for raw materials and make payments to suppliers.

It can help these types of businesses alleviate the cash flow problems arising from slow-paying clients.

Wrapping Up

Several companies often end up with a cash constraint if they don’t have access to traditional bank loans or lines of credit due to slow-paying customers or extended payment terms. Invoice factoring is being used by businesses to secure short-term financing using their invoices as collateral. The lending companies also enjoy a decent profit margin by leveraging their resources.

Finezza has developed a wide variety of products, including Loan Origination Software and Loan Management Software that helps banks, NBFCs, and other lenders track and manage credit applications, process KYC documents faster and streamline the entire lending process.

To implement smooth and efficient processes for your financing needs contact us today!

Decoding Buy Now Pay Later in B2B for Lending Business

Lending Lifecycle Management

The BNPL industry is having its time in the sun. The payment method completely overturned the business consumer market in the last 15 years. This short-term financing option allows consumers to make purchases and pay for them later, usually in instalments over a fixed period.

This gives them the flexibility they need to get things done without waiting too long. But if you look at the metrics, in many market sectors, Buy Now Pay Later has surpassed the peak and has entered a period of consolidation. And the next step forward seems to be stepping foot in the B2B division.

BNPL in B2B Commerce

Like its Business-to-Consumer (B2C) branch, Business-to-Business (B2B) BNPL is a form of short-term lending offered to business buyers at the POS or point of sale. However, this option allows buyers to spread or delay their payments while merchants are paid upfront, resulting in improved cash flow for all parties on deck.

The world of B2B e-commerce is in dire need of a digital revolution in terms of payment. The traditional way of extending credit lines in the B2B sector is outdated and inefficient. BNPL solves both of these problems. Although the rewards seem eye-catching, will BNPL find solid ground in this playfield?

Challenges For B2B BNPL Method

India’s B2B e-commerce market is booming and is expected to reach $1 trillion by 2024 (economic times). However, any Industry this widespread is hard to penetrate. BNPL’s descent into the sector will not be unchallenged. Here are some potential challenges:

1. Overthrowing the Traditional System

B2B credit approvals take weeks to go through. The process can be cumbersome and is already outdated. This system of manual credit approvals is a major hurdle for businesses of all sizes to overcome. This results in a lag between getting customers to sign up and buying from suppliers. It leads to slow customer onboarding and a slow buying process for buyers.

Currently, banks are the sole risk taker in the traditional model of using credit cards. However, since banks operate at a much larger scale than BNPL service providers, disrupting their traditional model can be even more challenging than it seems.

The costs associated with using BNPL services could be higher than the nominal rates charged by credit cards. BNPL providers would need to partner with all lenders to underwrite the risk of borrowers not paying their loans. This allows suppliers to accelerate cash and potentially reduce costs by moving to a different lending model than traditional credit cards.

2. Seamless Integration with B2B

Successful integration of BNPL with the checkout process of the B2B company will require significant resources and coordination. Making the process even slightly easier could lead to lower conversion rates and smaller average order sizes. The checkout process is dominated by debit and credit cards, and you have the option of saving your cards for future purchases.

Currently, many BNPL services rely on third-party credit programs to provide them with the necessary funding. The goal should be to integrate their services with traditional supply-side credit cards to provide a more streamlined service for sellers and buyers.

If successful, this can result in cheaper financing for sellers than credit cards. It will be a win-win situation for everyone involved in the transaction. Merchants will get paid upfront, and buyers will not need to worry about capital or resources.

What Does The Future Hold?

The B2B BNPL offers opportunities to businesses that have been denied access to working capital and purchase financing, allowing them to spend more time on their business affairs. In addition, the product is easy to deploy with its transaction and cash flow-based underwriting.

The supply of risk is largely reduced through the use of multiple data points such as traditional credit data, open banking, and alternative valuation data. It also extends the credit pool to New Credit (NTC) businesses, ensuring credit inclusion.

Wrapping Up

BNPL has just begun its journey in India recently and, in a short period, has become one of the most favoured payment methods among Indian shoppers. The convenience of this concept is new and exciting.

Deepak Jain, the co-founder of FlexiLoans, says, “There aren’t too many B2B BNPL products in the market, but it can be a gamechanger in the next 12-18 months”.

If businesses don’t offer convenient payment terms online, they’ll lose customers to competitors who have already implemented a BNPL solution or plan to do so soon. As more businesses migrate their purchases to online channels, there is an increasing demand for a modern, digital alternative to trade credit.

If you’re looking to streamline the loan lifecycle seamlessly, check out Finezza. It is a cloud-based, intuitive lending solution designed with embedded functionalities. Get in touch with us to know more about our offerings.

The Impact of Buy Now, Pay Later on B2B Finance

Lending Lifecycle Management

Buy Now, Pay Later (BNPL) FinTech companies are on their way to transforming how consumers shop for products. While BNPL is not an entirely new concept, it is the latest and most advanced version. Traditionally, shoppers could use EMIs and other credit forms such as credit cards. However, BNPL has made the entire process much simpler for consumers. In addition, BNPL companies do not even charge any interest from the end consumer for utilizing their services.

BNPL has significantly impacted the consumer (B2C) front, can it do the same for the Business-to-Business (B2B) industry? While B2C retailers have found that integrating BNPL services in their checkout services has helped improve conversion rates and increase average order values, can the same be replicated on the B2B front?

BNPL and B2B Trade Finance

While expanding to the B2B industry seems like the next logical step for BNPL providers, there are some challenges.

The Question of Risk

Before the widespread adoption of BNPL in B2B finance, one of the main questions is who would bear the burden of collection in case of customer non-payment? Banks bear that risk in the current traditional model using credit cards. Since banks operate at a much large scale than the largest BNPL service provider, disrupting this traditional model can be even more challenging than it first appears.

Lenders who have collaborated with such providers will demand a premium if the risk is to be borne by the BNPL providers since they will be responsible for the customer’s unpaid balance. This will lead to higher costs for the suppliers, who will have to offer discounts to make up for the difference, reducing their margins.

Overall, it may not be worth it for suppliers to switch to BNPL services over credit cards. This is because the cost associated with BNPL services could be higher when compared to the nominal rates that credit cards charge.

Further, BNPL providers would have to enter into partnerships with all lenders in order to underwrite the risk associated with non-payment. It can quickly become a highly complex process that would have its own cost structure.

One possible solution is for BNPL services to use emerging technology to automate the underwriting process and use machine learning to make better credit decisions. This can lead to a more streamlined customer approach and inculcate higher brand loyalty.

The Challenge of a Streamlined Process

BNPL needs to successfully integrate with the checkout process of the B2B vendor. If the process is made even slightly less hassle-free, it could lead to lower conversion rates and lower average order size. Debit cards and credit cards dominate the current checkout process, and you even have the option of saving your cards for future purchases.

BNPL service providers are currently largely dependent upon third-party credit programs. The goal should be to integrate their services with traditional supply-side credit cards to offer a streamlined service to vendors and buyers.

If done successfully, this may lead to more cost-effective financing for the vendors than credit cards. However, implementing such an integration is not without its challenges.

During the checkout process, the buyer will have to “sign up” for the program. And in case they get rejected, then they may not go through with the purchase at all. BNPL providers are asking the vendors to bear this kind of risk. In such a situation, the vendor will want higher control of the credit program to ensure it suits their needs.

The Future Outlook

A lot has been said about the possibilities of BNPL in the B2B space. Several global companies are exploring this space, such as Apruve and Slope.

However, any B2B vendor looking to change how financing is done in the space will need to consider many factors and deal with them step-by-step. The end result could end up transforming their business, which is a high incentive.

If successfully implemented, it may even force credit card lenders to improve their rates, which could trickle down throughout the payments space.

Overall, it is remarkable to consider where the BNPL space is headed. The adoption of BNPL has just gone mainstream in the B2C space worldwide, and vendors and service providers are already reaping the benefits. However, there is a long road to travel if they’re looking to truly disrupt the payments space and make a positive change compared to what existed before.

Wrapping Up

BNPL has just started being adopted in India and has entered the collective consciousness of shoppers in the country. Even though the concept is not new, the added convenience certainly is.

Finezza is a cloud-based lending solution designed for a hassle-free loan lifecycle with streamlined functionalities. Get in touch with us to know more about our offerings.

What Does RBI’s Rate Hike Mean for the BNPL Business Model?

Lending Lifecycle Management

There’s no doubt that RBI’s rate hike is a harbinger of changes in the financial world. During an unexpected policy announcement, the RBI increased repo rates by 40 base points to 4.4 percent in May and 4.9 percent in June. Given the soaring inflation across the country, RBI is expected to raise the rates again. As a result, the Buy Now Pay Later industry, one of the newest but fastest growing sectors in consumer finance, is certainly under scrutiny.

While BNPL might be a new addition to your vocab, the concept has existed for ages. Layaway credit, instalment plans, credit cards, and the khata system at grocery stores are all the same credit tools in different ways. BNPL is the latest version with a tech twist. It allows consumers the flexibility to divide payments conveniently for little or no expense.

How does the BNPL Model work?

With the payment option “Buy Now, Pay Later,” you can purchase without pinching your pockets. Typically, you sign up with a business that offers this service, and that business makes the payment for you.

However, after the lender makes a payment on your behalf, you must make the required repayments within a predetermined time frame. In contrast to a personal loan, most BNPL programs do not charge interest. You have two payment options: a lump sum payment or free Equated Monthly Instalments (EMIs). The lender can charge interest if you’re unable to make the payment within the given time.

The BNPL sector has ballooned after the global pandemic pushed the use of the internet and smartphones to its zenith. Another reason the BNPL found solid ground in the Indian market is low credit penetration. There are only roughly 3 credit card users for every 100 card users in India (globalnewswire).

Thus, BNPL became the “credit product” for users as much as it was a convenience product. The industry has entirely changed due to the flexibility that BNPL schemes provide, especially for younger consumers willing to trade traditional credit cards for more streamlined BNPL schemes..

However, the days of glory seem to be coming to an end. The conditions that drove the industry’s rapid expansion are dying as consumers cut down on their spending, and rising interest rates drive up the borrowing costs of BNPL firms, reducing their profitability.

What does the rate hike mean for the BNPL Model?

BNPL payments are mostly interest-less, and the rates they charge later are minimal. But most companies that provide Buy Now, Pay Later services are not financial institutions and thus don’t have access to huge deposits. So in most cases, companies must borrow these funds to make loans.

But as RBI hikes repo rates and banks chase to keep pace, the interest rates connected with borrowing those funds rise. As a result, it becomes more expensive for them to lend money to consumers, which puts pressure on their profit margins.

BNPL industries earn their revenue from two sources:

1. From Sellers

To avail of BNPL as an alternative payment option, vendors must pay a transaction charge like any other medium at a specific rate. BNPL companies also work to bring more consumer traffic to the vendor. They sell their services, claiming convenience and ease of transactions. This would further convince more vendors to buy into the BNPL service, thus increasing revenue.

2. From Customers

Although it is not widespread, third-party BNPL providers perform light credit checks to prevent lending money to users with bad credit history. BNPL also monetizes its customers by sometimes charging interest or late fees.

The BNPL industry is yet to prove its sustainability. With the repo rate hike, what could change?

The businesses will try to create more friction between customer interaction by introducing checks. These checks will screen its users for creditworthiness. This friction could tip the scales for merchants as BNPL services drive consumers to their websites.

Small BNPL players could potentially run out of business or merge with tech giants to sustain themselves.

Conclusion

India’s BNPL sector sits at a whopping $3-3.5 billion today but could potentially expand to $45-50 billion by 2026 (Decentro). The rate hike is going to impact the sector one way or another. Any lending product risks higher default rates whenever the economic cycle declines. But BNPL firms may have a safe cover in their ability to control what kind of line of credit they offer consumers, typically shorter-term loans.

If you’re looking for a loan management system, you’re at the right place. Finezza offers easy-to-use loan cycle management solutions to level up your financial game. Get in touch with us today.