Alternative financing has taken a much slower road to innovation in the Business-to-Business (B2B) space compared to the level of innovation in consumer financing, and so far has made much less progress.
The Current State of B2B Financing Alternatives
To date, there have been only two main alternatives to traditional bank business loans for small to medium-sized businesses: alternative providers of short-term loans or lines of credit, and modernized versions of invoice factoring (also known as invoice financing). Last month, Splitit has launched Splitit Business Payments, in order to bring a category-leading alternative consumer financing model to the B2B world.
Leading providers in the alternative B2B lending / line of credit space include BlueVine, Fundbox, Kabbage, Lending Club, Lendio, and OnDeck. The available options vary across these providers, but they have a number of features in common. They are initiated by the borrower and can be used at the borrower’s discretion to cover payroll, operating expenses, or purchases from suppliers. Applying for any of these unsecured credit options means undergoing a credit check, meeting thresholds such as annual revenue figures, open invoices, age of the business, and the business owners’ credit history and credit scores. Most of these options have higher APRs than a typical corporate credit card.
Modernized invoice financing provides a cash advance to a business on the basis of its current unpaid accounts receivable. Some lenders also review the borrower’s credit, but the main factor behind lending decisions lies in using unpaid invoices as collateral. As with alternative B2B lenders, the entire transaction is initiated by the borrower. Once credit is approved, the lender will advance 80% – 85% of the receivable amount. The remaining percentage is held to cover processing fees and weekly charges (most commonly, 1% per week). The main difference between invoice financing and invoice factoring is that invoice financing leaves collecting the original invoice amount in the borrower’s hands, while the factor is purchasing the invoice outright and will collect from the borrower’s customers directly. Companies in this space include Behalf, BlueVine, and Fundbox (note that many providers offer both line of credit and invoice financing or factoring products).
The Next Stage of Evolution
Neither of these dominant options yields a significant advance over traditional borrowing, although they can simplify the process. The next stage of evolution in B2B alternative financing is the ability for a supplier to offer terms directly to a buyer. In general, this creates significant advantages. It allows a small to medium-sized provider of goods or services to make it easier for their business customers to make purchases, and it strengthens the relationship between a supplier and a buyer. It also makes it easier for suppliers to take the risk of working with new buyers.
This form of purchase financing is quite familiar in the world of consumer purchasing. Merchants have a wide range of allowing consumers to finance a purchase immediately at the point of purchase. See our recent Whitepaper “The New Installment Landscape” for an in-depth analysis of consumer options. Resolve Pay has made some early inroads into this space by allowing suppliers to offer and then finance net terms to buyers. At the time of purchase, a buyer finances the purchase. Resolve Pay automatically deposits the funds into the seller’s bank account; they then invoice the customer and handle billings and collections. This model is an advance because it works at the point and time of purchase, but in many ways, it still carries over the concept of factoring. It means that a supplier cedes control of its financial relationship with buyers. In this sense, the model resembles many consumer purchase financing options such as Affirm, AfterPay, or Klarna (among many others).
Splitit Business Payments
The launch of Splitit Business Payments is advancing innovation in B2B financing by allowing suppliers to pay in installments using their existing card-based credit. At the time of purchase, a buyer whose supplier offers Splitit can opt to pay in multiple installments. This results in a hold for the total amount on the buyer’s credit card. The supplier ships the goods and initiates installment payments. The buyer makes monthly payments on their credit card as agreed with the supplier. The buyer undergoes no credit checks or other application process, because credit is already available on their existing corporate credit card account.
The Benefits of Splitit
Unlike financing that is initiated by the buyer alone, card-financed B2B installments create benefits for both buyers and suppliers. Both parties improve their cash flow while increasing their reach (either to place larger orders or to fill orders from new accounts). Buyers can get better payment terms and retain the benefits of their cardholder incentives. Suppliers can save collection time and expenses, and avoid the risk of souring a new account relationship by turning over collections to an aggressive third party.
In short, this alternative financing model becomes a relationship builder rather than an annoyance or stressor. It offers a significant advance over the initial stirrings of innovation we have seen to date in B2B financing, and connects to the broader trend of offering a consumer-like ease-of-use in the bigger picture of payment and financing innovation.