CEO at Novae, accelerating the revenue of businesses with consumer financing, business funding, and credit building services.
Recently, you may have noticed a new option popping up when you’re shopping online. Next to the cost of the items you’re looking at, you’ll often see a second price that’s a small fraction of the list price and gives you the option of paying a small portion upfront and the rest at a later time.
This is known as buy now, pay later (BNPL). Like “easy pay” and other forms of installment payments, BNPL allows customers to pay for their item over an extended period of time, paying just a small fraction of the price upfront or paying nothing upfront at all. Klarna is the giant of the industry at the moment, though many other BNPL companies exist, such as Affirm, Afterpay and Splitit. Each has its own unique terms of service and may specialize in different industries. My company, for instance, specializes in providing BNPL options for service providers in the fields of health, consulting and others.
Through my experience, I’ve seen how working with BNPL services can be a game-changer for a business. Why is that? The logic is simple: Customers buy more when they can do it with less money. One survey by Cardify (via CNBC) found that 48% of consumers said BNPL would allow them to spend 10-20% more compared to using a credit card.
This can lead to increases in revenue for businesses and buying power for customers. Another advantage for businesses is that lenders pay the retailer or service provider, regardless of whether the customer has paid, as well as handle collections. And as the seller, you can incentivize more and larger purchases of your goods and services over time. This is why I believe the BNPL trend has grown in recent years.
If you’re considering investing in BNPL, there are a few steps you should take and some considerations you should make to ensure a smooth process in being able to offer financing services.
Understand the difference between financing and funding.
Many businesses partner with BNPL companies to get their customers a personal loan where the customer is given the money and then, in turn, pays the business owner. Ideally, this happens, but many times the consumer changes their mind about the purchase and just keeps the money.
Financing works differently, in that the consumer is seeking to qualify for the amount of the purchase and the lender pays the business owner directly. And it’s kind of like financing a home or financing a car. That’s how financing works differently than funding.
Prepare for a background and credit check.
Since lenders want to know your business is reputable, most BNPL service providers require you to go through a background and credit check. Your business must be in good standing, and there are usually some credit score minimum requirements for the principal owners of the company to meet. There may be some minimum years in business requirements as well as revenue thresholds to meet. Researching the BNPL service providers beforehand will help prepare you for their underwriting process.
Look into industry-specific finance options.
You should check to see if the BNPL provider offers financing services for your industry. Some industries that don’t offer traditional products or that the lender can’t secure the loan with may not allow you to finance your products and or services. While there are some, based on my observations, there are very few BNPL providers that offer financing for service-based industries.
Compare the application processes.
It’s important to identify a BNPL option that offers a seamless application and approval process. With many advancements in financial technology (fintech), BNPL options are usually automated without the need to speak to a human for approval. However, some BNPL platforms may not support such technology.
Compare BNPL providers.
Prior to moving forward with any BNPL provider, you should identify if the application and approval process will add stress to your sales cycle or actually improve it. For example, if your customer can’t complete the application online, the additional steps in your sales cycle will require more of your customer. This should be considered, as you may lose customers to any competition that has more advanced BNPL technology.
Choose the type of rate sheet you want.
A BNPL provider that allows you to choose the type of rate sheet you want to offer your potential customer base is important. If you know that your product or service will draw more credit-challenged customers, you will need the ability to approve customers with lower credit scores, but this will often come with higher interest rates. If you have a more prime credit customer base with higher credit scores, they will have an appetite for lower interest rates or no interest rate at all. Having the power to choose gives you an edge over the competition.
With the BNPL market exploding due to the advantages of this model for businesses and consumers alike, you can likely find an option for your industry. I believe there’s no better moment to look into BNPL. The technology is still relatively fresh in many industries, and early adopters can enjoy advantages over their competition. Watching the market trends, I predict that BNPL becomes the norm in decades to come, but right now there’s still time to be ahead of the curve.