In 2020, we released a large content series focused on B2B Marketplaces. We had been investing in the category of companies since our 2014 Transfix investment and wanted to go deep on our thinking and learn from others. We’ve kept up investing in B2B Marketplaces,…
B2B marketplaces are creating a completely new way for trade to be online. With that, comes new territory on so many fronts. Payments being a big one. Buy Now Pay Later, or BNPL, is a great example. BNPL for businesses has existed since the beginning of commerce in the form of net terms. What hasn’t existed is the consumer-like financing experience and that’s where things get tricky.
The net terms basics
Net terms are a way to extend financing to buyers. Not only do buyers expect terms, but they help suppliers sell more. On the business side, net terms can be a means for monetization – the more value you add, the more take rate you can charge. So they are not a nice-to-have but a business requirement to facilitate B2B transactions. Now the question is, how do you add financing to your tech stack?
Marketplaces have two choices – build a net terms offering themselves or look to a partner. And while there are factoring and financing solutions that help merchants offer digital terms, few are built specifically for the financing needs of marketplaces. We’ll cover exactly what these needs are in the following sections.
Offering the right marketplace experience
Most B2B payment companies don’t have the ability to offer net terms across multiple vendors. But buyers want to buy from multiple sellers – so marketplaces need a way to offer net terms across different third-party products, within the same cart. In this case, extending a 1:1 credit limit on each purchase just won’t cut it. Buyers can have a much more seamless marketplace experience if they can qualify for terms once and then purchase from any vendor they want.
Another thing to consider is how net terms are presented to your buyers. For them, purchasing on marketplaces is still a relatively new way to buy online. Applying for terms with an unknown third-party can jeopardize trust or simply confuse your buyers. A white-labeled solution lets you own the payment experience while keeping you out of the tricky part of collection or invoice management.
Risk underwriting for a multi-sided transaction
Marketplaces are inherently not financial institutions. So to take on the financing of buyers is like asking a bank to start selling you clothes. The expertise it takes to evaluate the financial health of a business is not something that you can just hire for. Especially for marketplaces where you are essentially evaluating if your customer’s customer can and will pay for their goods.
Solutions that are built for marketplaces have the expertise to know the unique legal relationships that need to be in place. This means, for example, having return and dispute policies that protect all sides of the transaction. It also means funding the transaction at the milestone in which there is the least risk involved of disputes happening in the first place. You want a solution that takes on the complex underwriting process so that you can focus on growth and not financing.
Qualification for net terms needs to be fast and flexible
Offering fast, flexible terms can be a huge benefit for marketplaces. Depending on the transaction, buyers might want to request extended terms or update their term limits. Without being able to quickly qualify or adjust terms, buyers might simply choose to purchase elsewhere.
Many solutions facilitate transactions out to different financial institutions (banks, lenders, factors, etc.) In this case, the financing decision isn’t done in-house and the experience for your customers can take a hit. If buyers want to increase their terms, the factoring or working capital company needs to go to the bank or financial institution to then come back with a decision. This can not only create friction in the white-labeled experience but lead to slower turnaround times for decisions and support.
Solutions that have their own in-house technology can maximize the speed of qualification and quickly update transactions and milestones as needed. For example, a new business might lack a strong credit history but show high growth potential. These nuances come from understanding buyers and their business. By offering multiple ways to qualify (through bank linking or a short application) – marketplaces can maximize approvals and lead more customers to purchase.
Managing collection in a positive way
Some providers might handle financing but not offer flexibility on how buyers are reminded of payment or on what options they have to pay with. For marketplaces, this can be tricky. You don’t want to act like a bank – you want to offer the best products and services to your customers. But when it comes to net terms, you can be put in a position where you now need to consider things like: How often should buyers be reminded of payment? How should they be reminded? Without the right approach, this process can create friction and drive a wedge between you and your customers.
It all comes down to how you can boost the relationship with your customers while staying out of the collections process. Maybe you have buyers who are always late but you know they can afford the purchase. Chasing them for payment in this case would create unnecessary friction. On the other hand, maybe you do want to contact buyers who are late but with a provider that keeps your brand out of it. Look for a solution that can give you the options and tools to customize the communication with your buyers.
Marketplaces need to grab new sellers’ attention and encourage them to stay with services and features that can help their businesses survive and thrive. On the same note, buyers can choose to take their business elsewhere if the checkout experience isn’t easy and catered to their needs. Ultimately, offering fast, flexible net terms that don’t add friction to the customer experience but encourage a positive payments experience, can maximize growth, and drive loyalty with your customers.
This post is a collaboration with Balance, an embedded B2B payments partner for marketplaces.
If you liked “The Financing Dilemma - How B2B Marketplaces Can Get It Right” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on trends across fintech in the coming weeks.
Loren Straub and Gabe Hawkes of Bowery Capital sat down with Jillian Williams of Cowboy Ventures to dig deeper into one of the hottest markets in fintech, Buy Now Pay Later.