By far, the biggest dangers to the health of small and medium sized enterprises (SMEs) are cash flow issues. In fact, more than 80% of business closures are attributed to poor cash management practices. In an ongoing series of blog posts, we’ve been exploring the B2B financing options that can make the difference between success and failure for SMEs. This time we look at revolving credit versus B2B Buy Now, Pay Later.
Revolving credit is an arrangement that enables businesses to access a predetermined amount of funds repeatedly, provided they remain within the established credit limit and meet the repayment terms. Unlike an instalment loan, where you receive a lump sum and repay it over a fixed period, revolving credit provides more flexibility in terms of borrowing and repaying.
B2B Buy Now, Pay Later (BNPL) is another form of business financing that has become increasingly popular in recent years. Similar to invoice factoring, it enables sellers to get paid upfront and in full for purchases, while their buyers get 30, 60 or 90 days to pay.
Both of these financing options help B2B sellers improve their day-to-day cash flow management, but which is right for your business?
Please be aware that while this guide is intended to be helpful, it is not financial advice.
B2B BNPL vs revolving credit: an overview
The table below shows an overview of how B2B Buy Now, Pay Later stacks up against revolving credit.
Let’s dive in and learn more about revolving credit and B2B Buy Now, Pay Later.
What is revolving credit?
Just like a credit card or an overdraft, revolving credit can be a useful financing option for businesses that need to dip into a pre-agreed loan from time to time. The capital is borrowed and repaid into the same pool.
You could imagine this type of finance like a set of revolving doors. A business might take money out one day and put money in another. Businesses will usually be expected to pay back a minimum amount each month. But, they can usually continue to withdraw credit, even as they pay it back in.
Although revolving credit is very similar to a credit card, it’s not quite the same thing. Cards are not usually issued, and the money is usually paid and spent using bank transfers.
Revolving credit may also be known as:
- Operating line
- Bank line
- Revolver
What are the advantages of revolving credit?
Revolving credit offers several benefits for B2B sellers. Here are some of the key advantages:
1. The option to make overpayments
Revolving credit gives businesses control to make overpayments whenever they can. This can be especially useful if they want to draw down their financing and become debt-free when business soars. This can also help to avoid paying interest.
2. Convenient repayment plans
These accounts typically require a minimum monthly payment based on the outstanding balance. This can offer more flexibility in terms of repayment compared to fixed instalment loans.
3. Boost your business credit score
Properly managing a revolving credit account can contribute positively to the credit history and credit score of your business. Timely payments and responsible credit utilisation can improve your creditworthiness over time, unlocking access to better interest rates.
4. Saves time and resources
Once a business has a credit line set up, they won’t need to reapply each time they want access to funds. This saves time and resources.
5. A flexible approach to credit
Borrowers can access funds as needed, up to their credit limit, without the need to reapply for a new loan each time. This is particularly useful for managing unpredictable expenses or cash flow fluctuations.
6. Continuous Access
Unlike a traditional instalment loan, revolving credit allows you to repeatedly borrow and repay funds. As you make repayments, the credit becomes available again, providing a continuous source of cash for future needs.
7. Rewards from your lender
Depending on the lender, you could gain business rewards such as cash back, travel miles, or points for purchases made.
8. Fast access to emergency funding
Revolving credit can serve as a safety net for unexpected expenses, emergencies and other urgent financial needs. It provides quick access to funds without the delays associated with applying for a new loan.
What are the disadvantages of revolving credit?
There are also some disadvantages to consider when it comes to revolving credit. These include:
1. Risk of unsustainable debt
Revolving credit can be a bit too easy to use. Just as credit card debt can spiral, businesses can also find themselves embroiled in unsustainable debt if revolving credit isn’t used carefully.
2. High interest rates
Although interest can be avoided by paying back borrowed funds quickly, interest rates are usually higher for revolving credit than for fixed loans.
3. Missed payments can cause poor credit rating
As with many other types of loans and financing, if you miss repayments, your credit score could suffer, and you may incur higher interest rates.
4. Loans may be secured
Some lenders use debt collectors and bailiffs, which could mean that your business assets are taken away if you can’t repay the loan. Before signing up, check to see if the credit is secured or unsecured. But be aware that unsecured loans usually have higher interest rates.
5. Fraud potential
Revolving credit is a target for scams. Businesses should be aware of fake bills or phishing attacks.
What type of business could benefit from revolving credit?
Some businesses may benefit from revolving credit more than others. If your business matches the descriptions below, it might be worth considering this type of B2B financing.
- Firms looking to boost their credit score.
- Businesses who need access to a loan, but do not qualify for or want a business loan.
- Companies with a good credit score will benefit from better interest rates.
- Those who need to cover short-term cash flow management issues.
What type of business is not a good match?
However, some B2B sellers won’t find revolving credit to be the best form of financing for their business. These include:
- Companies with poor credit history. They are likely to incur higher interest rates, which could worsen existing cash flow problems.
- Business owners who find it hard to resist spending when credit is readily available.
What is B2B BNPL?
The concept of Buy Now, Pay Later (BNPL) is familiar to most consumers, either through personal use or hearing about it. Notable providers like Klarna, ClearPay and even Apple have become synonymous with this approach. At the point of purchase, customers are presented with the option to settle their payment after 30 days or split it into three equal monthly instalments. Meanwhile, the merchant receives the full amount (minus a small fee) immediately.
However, BNPL is not a novel concept. Retailers specialising in furniture and kitchen appliances have been offering this service in stores for years. In a similar vein, businesses have always used trade credit as a tool to defer payment.
What does stand out is the infusion of payments and technology. This is part of the broader trend of "embedded finance," which has been particularly transformative for e-commerce platforms. In recent times, B2B (business-to-business) sellers and buyers have begun to embrace BNPL. Buyers get the opportunity to pay later, while suppliers receive funds upfront. You could say it’s similar to invoice factoring, but the speed of the process sets it apart.
What are the advantages of B2B BNPL?
1. Immediate and full payment
Gaining upfront and complete payment upon product delivery significantly bolsters your cash flow. This allows you to channel resources towards business expansion and growth.
2. Guaranteed receipt of funds
Solutions like Hokodo's ensure that suppliers receive and retain the entire invoiced amount, even in cases where the lender faces difficulties in recovering payment. Conversely, traditional lenders might attempt to recoup losses from suppliers if they can't retrieve payment from buyers.
3. Buyer-friendly payment terms
B2B BNPL solutions not only serve your interests but also grant the ability to extend favourable payment terms to your buyers.
4. Resource and time efficiency
The full trade credit management process is encapsulated in a B2B Buy Now, Pay Later solution. This integration saves the effort and resources typically expended on tasks like fraud checks, credit assessment, financing, insurance, payment processing, and collections.
5. Seamless checkout integration
B2B BNPL platforms offer seamless plugins and integrations that enhance your business operations and record keeping. Buyers experience a frictionless checkout process, while you are spared the administrative complexities.
6. Risk management and protection
Sellers are fully protected against credit and fraud risks, with the B2B BNPL provider assuming responsibility.
7. No collateral requirement
Unlike some revolving credit facilities, B2B BNPL does not require any assets to be secured against the financing (similar to factoring).
What are the disadvantages of B2B BNPL?
1. Limited suitability for offline sellers
Situations where sellers lack online platforms or buyers favour conventional invoices might create friction with some BNPL providers. However, Hokodo's solutions can seamlessly integrate into offline sales channels.
2. Third-party involvement
Your chosen B2B BNPL provider becomes responsible for payment collection and buyer correspondence. Mishandling of these aspects could potentially impact your commercial relationships.
3. Fee structure
A fee is involved when you integrate a BNPL solution, which varies depending on the supplier. With Hokodo, a small percentage of the value of each BNPL transaction is taken as a fee.
What type of business could benefit from B2B BNPL?
B2B Buy Now, Pay Later has broad application and can positively impact various types of businesses including:
- E-commerce platforms where suppliers conduct online sales.
- Businesses with both online and offline sales aiming to streamline their payment methods.
- Enterprises desiring to extend trade credit in an online environment.
- Businesses that require swift invoice settlement for enhanced cash flow while wanting to offer attractive payment terms to buyers.
Shonn Brothers, a wholesaler based in Manchester, is one example of a business capitalising on the advantages of B2B Buy Now, Pay Later solutions.
According to Director, Daniel Shonn: “Hokodo has provided an innovative and revolutionary experience for our wholesale and trade customers giving them the opportunity to Buy Now, Pay Later. It is an interesting proposition with great sales potential.”
What type of business is not a good match?
There are a few business types that might not find B2B BNPL to be so effective. These include:
- Businesses without online platforms that are resistant to adopting digital solutions for offline transactions.
- Businesses offering bespoke services and reliant on manual invoicing processes.
Revolving credit vs B2B BNPL: which is right for you?
If you are a B2B supplier with an online or offline platform, BNPL could be a great option not just for you but also for your buyers. It gives them another payment choice and the chance to defer payment, while you receive funds upfront and are protected against risk. Before going ahead, always check that you’re happy with the lender who could be dealing directly with your clients.
If you need relatively small and short-term credit from time to time, revolving credit could be a good option for you. It could also help you to boost your credit score. However, do be careful to avoid high interest rates and falling into unsustainable spending patterns.
Download our ultimate guide to learn more about your options when it comes to B2B financing.
