B2B BNPL Helps SMBs Create Runways to Growth

The cash conversion cycle is a metric every SMB should be monitoring to ensure healthy cash flow.

But before there’s cash flow, SMBs need to get off the ground, with the equipment and inventory they need to actually launch.

Plastiq COO Stoyan Kenderov and Obvi CEO and Co-founder Ronak Shah said that B2B BNPL can help SMBs, particularly retailers, bootstrap more efficiently, unlock cash flow and scale.

The two executives told PYMNTS that as more people are being thrown out of work, they’re turning into entrepreneurs, and historically, recessionary (or pre-recessionary) environments have been hotbeds for new business formation.

The bootstrapping process — where companies get up and running with little capital, relying on money other than outside investments — has become a dicey proposition.

Uncertainty reigns right as new businesses launch. The SMBs seeking to get off the ground, even the seasoned SMBs confronted by macro pressures, cannot buy too much inventory, because there’s no telling whether that inventory will be sold. They can’t buy too much media, because there’s no certainty end customers can be reached.

“If you do too little,” said Shah, “you’re giving up opportunity. The middle ground is so vague right now.” And there’s additional pressure tied to the fact that the cost of capital has gotten increasingly costly.  A small business loan from the bank is now sporting an interest rate that is 4% to 5% higher than a year ago.

Credit card debt is also more expensive than has been seen in generations.

“These small business owners and founders are not going to be able to go and get funding from traditional sources, and they will not be approved for a loan,” said Kenderov.

What SMB owners need, said Shah and Kenderov, is a flexible financing tool that can help them get over the hump.  Consumers who are business owners are already familiar with BNPL, so there’s a natural fit in taking on that financing option as SMBs get everything in place to get going.

A new wave of BNPL providers is using data to extend B2B-focused loans, which wind up being cheaper than traditional funding. The risk models (such as used by Plastiq) are able to use advanced technologies and determine payback periods. BNPL makes it possible for a new business to spread out their initial spend on inventory or advertising (or other aspects of operations) a bit more evenly, and see how business picks up over time, Shah and Kenderov said.

Kenderov contended there are fundamental differences in how consumers and businesses use BNPL, and thus there are some key differences in how those programs are, and should be, designed.

Consumers, he said, use BNPL to see what they can get, at lower cost. BNPL fits in with their desire to spread out their payments over a long-term time frame — and oftentimes they don’t expect to see their incomes change drastically. As Kenderov said of those individuals, “they think they have all the time in the world to pay things off. So they’re happy to take on a longer term BNPL loan.”

No Impulse Buying 

By way of contrast, a business takes a far more critical look at their spend — and impulsive buying is not part of the mix.

“Sooner or later,” Knderov said, “the business owner realizes they have obligations they need to meet, and those obligations mount over time.” It becomes harder and more complex to layer on vendors and expenses, and to manage forward-looking obligations. That means making the BNPL loans shorter, not longer.

Asked by PYMNTS about credit risks and the specter of defaults, Kenderov said that just as has been the case with consumer BNPL, fears over non-performance have proven unfounded.

“We haven’t seen any negative trends with regards to delinquencies on B2B BNPL loans,” he said.

And, added Kenderov, the threat of regulation that looms over BNPL in the consumer arena need not be a similar overhang in the B2B space. Short-term interest loans have been a staple of commercial enterprises for a long, long time — spanning working capital loans or lines of credit.

“There is far less of a concern that these businesses will not understand how these loans work, or how they can be adopted,” he said.

Added Shah: “Businesses need to create runways for themselves…and if you’re not using BNPL to do that, you’re not thinking in 12 to 18 month landscapes. You’re looking at only a few months.”