Invoice factoring vs. B2B BNPL

This article provides a simple comparison between invoice factoring and B2B BNPL (Buy Now, Pay Later), two ways that merchants can improve their cash flow.

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When two businesses trade, one often waits to get paid. This can be hard, especially for SMEs or growing companies. AREA42’s research shows 72% of strictly and mainly B2B companies accept payment terms.

Businesses need cash to pay bills, invest in stock and supplies, and keep operations going. Using a trade financing instrument helps companies get the money they need now rather than waiting months and months to get paid. 

What’s the difference between invoice factoring and B2B BNPL (Buy Now, Pay Later)?

What is invoice factoring?

Invoice factoring lets businesses get cash right away by selling their unpaid invoices, i.e. accounts receivable. Here’s how it works:

1. A company sells a product or service to another company.
2. They send an invoice to the buyer, but the buyer has time to pay, often 30 to 90 days.
3. Instead of waiting, the seller sells this invoice to a factoring company at a discount.
4. The factoring company gives them a large portion of the money upfront. The percent varies, but often they buy the invoice at 80% or 85% of the cost. This is often called selling your accounts receivables at a discount.
5. When the buyer pays the invoice later, the factoring company collects it.

In short, invoice factoring helps businesses get most of their money quickly by trading the right to collect that invoice. There’s less wait for incoming cash, although there is a cost.

What is B2B Buy Now, Pay Later (BNPL)?

B2B BNPL is a newer solution in trade finance. You might’ve heard of BNPL for shoppers; it lets people pay later when buying clothes, gadgets, and more. B2B BNPL does the same, but for businesses. Here’s how it works:

1. A company buys goods or services from another business – either directly or through a B2B marketplace.
2. Instead of paying immediately, they choose BNPL, e.g. this could be right at checkout.
3. This is where the third party BNPL company steps in, like Terms.Tech.
4. This third party pays the seller upfront and enables the seller to offer payment terms to the buyer.
5. The buyer then has more time to pay back the third party, usually 30 to 90 days (but the potential of up to 120 days with Terms.Tech).

With B2B BNPL, the seller gets paid quickly – perhaps upon delivery depending on financing provider – but the buyer enjoys more time to pay, just like in traditional trade credit.

Pros and cons of invoice factoring

Advantages of invoice factoring

• Fast cash flow: Sellers don’t wait long to get paid.
• Easier cash management: Companies get a predictable amount of cash.
• Simple setup: No complex terms. Just sell the invoice and get paid.

Disadvantages of invoice factoring

• Costly fees: Factoring companies take a cut, which can get expensive.
• Not 100%: An invoice is typically bought at a discount, perhaps 70-90% of the value. The factoring company provides this money to the seller as the advance, so the seller doesn’t get 100% of what the invoice is worth at that time.
• Credit checks: The buyer’s credit history impacts the process, as factoring companies want low-risk invoices.
• Reputation risks: Buyers might see factoring as a sign of financial stress.

Problems with factoring

There are also some problems or obstacles that can occur when factoring. 

Invoice factoring is backward-looking. What do we mean by that? Simply that the invoices that can be factored are from transactions that have already occurred. This leads to some issues, including:

• Partially fulfilled invoices: These invoices generally cannot be factored. In order to be factoring, the product (or service) on the invoice must be delivered in full. So, if a company has partially fulfilled invoices, those are not yet available for factoring. 
• Pre-billing invoices: Sometimes a company might send an invoice for a product (or service) before delivery. These invoices are also not available for factoring. 

Beyond that, some invoices may cause issues:

• Invoice verification: If an invoice cannot be verified by the factoring company, it cannot be factored.

Pros and cons of B2B BNPL

Advantages of B2B BNPL

• Instant payment: Sellers get paid right away. No stress! No late payments!
• Flexible payments for buyers: Buyers get more time to pay, which can boost sales and conversion.
• Boosts buyer relationships: When you enable buyers to enjoy the extra payment time, improving relationships and trust.
• 100%: With the right provider, 100% could be paid to the seller (rather than the discount used in factoring).

Disadvantages of B2B BNPL

• Costs of fees: Similar to factoring, BNPL comes with a fee. Each provider will have its own approach to pricing.
• Approval processes: Like factoring, BNPL providers might check the buyer’s credit or financial strength.
• Debt build-up: For buyers, BNPL can lead to a debt cycle if used too often.

Using Terms.Tech instead of invoice factoring

One of the companies making B2B BNPL work is Terms.Tech. We offer payments upon delivery to sellers and flexible payment terms to buyers. Sellers receive cash as if the buyer paid right away. Buyers get more time to make payments without pressure. This allows sellers to offer payment terms they might not be able to offer on their own. Terms.Tech also helps reduce the risk of unpaid invoices, which is a huge plus for sellers. (And, we look after collections and late payments!) We also offer a fully-integrated version or self-service solution.

What about geography? Terms.Tech is available throughout the whole EEA – so we have broad European reach setting us apart from other B2B BNPL payment terms solutions on the market.

Both invoice factoring and B2B BNPL provide ways to keep cash flowing in B2B trade. We won’t tell you which to choose! But, here are a few questions to ponder:

• Do you have your own ecommerce? 
• Or, are looking to set one up? 
• Are you already using invoice factoring?

If you’ve answered ‘yes’ to any of these, we recommend getting in touch with our experts to find out more about how Terms.Tech can help your cash flow woes! 

One more question: are you selling on a B2B marketplace and want to increase sales and conversions? Well, put that marketplace in touch with us, because we love partnering with B2B marketplaces in any industry!