In the world of consumer finance, the ability to use Buy Now Pay Later programs to make purchases from brick-and-mortar stores is old news.For some purchases they’re viewed with suspicion, but so-called layaway finance programs help many consumers make necessary purchases that considerably improve their lives.
But the world of Buy Now Pay Later financing is changing fast, and companies like Affirm, Klarna and many others are now offering online BNPL options for both consumers and small businesses that are changing the lay of the financial landscape.
The opportunities for small businesses are especially intriguing on both sides of the aisle. Some small businesses can use online to finance major purchases that otherwise wouldn’t fit into their business model, while others can provide that same kind of service to prospective customers who need more financial flexibility. As is the case with any new opportunity, there are plenty of potential benefits and pitfalls. The entire issue of using or offering an online Buy Now Pay Later can turn into a financial maze, so let’s try and sort through some of the particulars.
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How Buy Now Pay Later Programs are Structured
We’ll start by looking at some of the basic structures of BNPL programs. One of the most popular is the so-called “pay in 4” concept, which is offered by a number of companies, including PayPal and Klarna, among others.
The “pay in 4” plan concept is simple. It allows customers as diverse as retailers and ordinary consumers to pay for any online product by splitting the cost into four equal payments, sometimes over a set period of time, other times with no set time period at all. In general, there are two major advantages to this kind of structure. One is the lack of interest charges for small businesses who use it, and this is a significant benefit for consumers as well.
The other is the promise that using these programs won’t affect the client’s credit score, which was sometimes an issue with some brick-and-mortar BNPL programs that charged high short-term interest rates. It tends to be less of an issue for viable small businesses who use these programs, but it’s still nice to have the assurance that a company’s credit rating is off limits when using a Buy Now Pay Later loan for online purchases.
Other programs are more restrictive, though. Some BNPL arrangements have tighter timelines for making payments, and the possibility of penalties for late payments may come into play. For both small businesses and consumers, it’s important to know the financial parameters that are in play.
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BNPL Plusses and Minuses
Another issue with buy-now-pay-later programs has to do with the possible use of credit cards. For purchasers, the ability to avoid using one is a major benefit, regardless of whether the purchaser is a consumer or a small business.
For small businesses that choose to do this, though, there’s the problem of having to foot the bill for maintaining their programs, not to mention the fraud risks they’re taking on. Retailers that do this take on the risk based on the belief that it tends to promote larger purchases, which will in turn promote brand loyalty to both themselves and the products they offer.
Still another benefit that comes with online BNPLs is the speed factor. Transactions tend to be faster and easier, and this becomes a selling point for small businesses offering buy-now-pay-later programs and both the consumers and small businesses who use them.
Regardless of how you break it down, though, there’s little doubt about the growth of online Buy Now Pay Later programs. According to industry estimates, the buy-now-pay-later industry is expected to grow almost 10 percent over the next five years, with revenues expected to exceed a billion dollars.
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That explosive growth comes with both a benefit and a downside. Growth creates competition, which is especially beneficial for small business owners looking for BNPL programs that are structured to help them meet the unique demands of their market niche.
In addition, major companies like VISA are starting to get in on the Buy Now Pay Later explosion, which could help drive out some of the sketchier companies and make the industry that much more legitimate. Despite that competition, however, there’s a good chance there will always be a shady side to online Buy Now Pay Later programs, just as there is with brick-and-mortar layaway plans.
On the consumer side, the way this works can be all too familiar. It’s easy to fall behind on the payment plan schedule, for example, and even if payments are made on time there’s no opportunity to build or add to a client’s credit history.
For small businesses, there’s also the issue of the legality of any programs in which they participate. Some BNPL companies definitely push the boundaries when it comes to the definition of what constitutes a legal loan, and many times the devil can be hidden in the details of the fine print.
This issue can vary on a state-to-state basis as well. The law is definitely still playing catch-up with the technology of online BNPLs, so it’s important to review the terms and know whether the financial parameters are a good fit.
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The Small Business Bottom Line
So what’s the bottom line for small business owners ? Simple-for many small businesses, online Buy Now Pay Later programs can be a very attractive choice.They allow small owners to give potential customers another payment option that doesn’t involved using a credit card, and for some it can help avoid the hassle of having to do credit checks and some of the bookkeeping that inevitably comes with more structured payment programs.
But it’s also important to make sure these programs are in line with the business model for individual small businesses. It has to be easy for customers to select the option, and the payment plan options have to make sense in that context as well.
It’s definitely a brave new world for small business owners, and BNPL programs are destined to be an important part of it. The choices will only continue to grow, and knowing the issues and parameters can be a make or break factor for many small businesses.
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