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.
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!