Business growth often depends on the right push at the right time.
B2B financing can provide this.
There are a range of financing options that you can use directly or offer to your clients. Finding the right one from the right provider can be difficult.
Let’s look closer at this growing field and its powerful potential for smaller businesses and large corporations.
What is B2B financing?
Business-to-business (B2B) financing refers to a category of loans and credit especially for businesses or organizations working with other business customers.
It includes financial products ranging from traditional banks' business loans to alternative lenders' bespoke and industry-specific financing solutions.
All of these allow your business to access capital and improve its cash flow. This helps cover gaps in your operational costs, sales cycles, payroll funding, etc., and ultimately drive growth.
How does B2B financing work?
Once you apply for a B2B financing solution, the basic process is as follows: application process, approval, funding, and repayment.
The precise steps of each stage vary according to your company's eligibility, credit requirements, and the specific lending solutions and providers involved.
B2B financing providers
There are three main types of institutions you can consider for business financing:
1. Traditional banks
These financial institutions have dominated the B2B lending market for years. They offer businesses lending services such as business loans, lines of credit and credit cards. They have an established lending criteria for approving businesses with collateral and a good credit score.
2. Credit unions
Credit unions offer similar services to banks for specific industries or geographies.
Their goal is to provide their members with the best possible financial terms for their financial services and products.
3. Alternative lenders
The term ‘alternative lenders’ covers a range of different organizations, from challenger banks to specialist fintech lenders.
This type of finance provider first emerged in 2015 and has grown rapidly ever since. Global transaction volumes by alternative lenders (excluding data from China) surpassed 113 billion USD back in 2020.
Banks vs credit unions vs alternative lenders
Banks and credit unions have lengthier application processes than alternative lenders, but generally provide cheaper rates, too.
Banks are more easily accessible than credit unions, which might only have branches in specific areas. They are also easier to join. However, alternative providers are often easier to find and easier to join than both of them.
Each type of organization also has different approval rates for business customers. These change over time, but in April 2023, for example, the average approval rates for B2B small business loans were:
- 13.5% for big banks
- 18.5% for small banks
- 19.8% for credit unions
- 28.7% for alternative lenders
Alternative lenders generally have more financing options available than banks and credit unions, which often only offer the direct lending of bank loans or credit card solutions.
And alternative lenders often offer financing via technological innovation, which can be linked to value-added services, such as BNPL options. These include help with digital transformation, point of sale (POS) integration, automating existing processes, etc.
Two ways to use B2B financing
There are two main perspectives to look at B2B financing from.
1. Using financing for your business.
You can use directly use financing for your B2B business.
There are several benefits to this. They apply whether you secure it directly from a supplier or from a third-party provider. In fact, the supplier is likely to be using a third-party provider. Many of these benefits stem from the increased cash flow it brings.
Increased working capital enables your business to cover a range of existing expenses, such as rent, utilities, supplies, etc.
This helps you seize new business opportunities. For example, you may need to suddenly purchase inventory to fulfil large customer orders.
Increased cash flow is also useful if you are looking to scale up or expand your business operations more generally. You can use it to purchase new equipment, lease a new facility, hire additional staff, or increase marketing and sales spend.
And it can help with risk management by diversifying your loan portfolio.
2. Providing your customers with financing
Providing your business customers with financing can have a big impact on your business. It can be done directly or through a third-party provider.
It can increase your customers' the average order volume (AOV), purchase frequency, and customer loyalty.
This can give you a competitive advantage over industry players who don't offer it.
And it can provide data on borrower behaviour that gives you insights into your customer base and even market trends.
What are the different types of B2B financing?
1. Business loans
Business loans have long driven growth, especially for small and medium-sized businesses. They are typically provided by banks and credit unions.
To secure a business loan, your business needs to meet specific criteria related to creditworthiness, turnover, company size, lending duration, and business plans.
These focus on discerning whether a loan will constitute good debt, fostering growth and value, or bad debt-based financing that merely supports a failing business.
2. Venture debt financing
Venture debt financing is typically provided to early-stage, high-growth companies that have already raised equity financing from venture capital investors.
Unlike traditional debt financing, venture debt financing is often structured as a loan with equity-based features. This gives the lender the opportunity to purchase equity in your company at a future date.
3. Trade credit
Trade credit is an agreement that allows you to purchase goods or services and pay for them at a later date, usually within 30, 60, or 90-day net terms.
Terms vary widely depending between suppliers and industries. They may change over time depending on business relationships.
Some suppliers may offer discounts for early payment. Many charge interest or penalties for late payment.
4. Equity products
Equity products include equity investments from venture capital firms, angel or other institutional investors, and equity-based crowdfunding platforms.
They typically involve giving up a portion of your business ownership. And investors may require a higher return on their equity investment than lenders who provide debt financing.
They can also include other equity-based financing options such as stock options, convertible debt, or warrants. These give the investor the right to purchase shares of the company's stock.
5. Invoice financing
There are two main types of invoice financing.
Invoice Discounting
Invoice discounting is a type of short-term financing that enables you to gain cash quickly by selling your outstanding invoices to a lender at a discount.
Your lender advances you most of the value of your issued invoices upfront. This saves you waiting for your customers to pay the full amount owed.
You receive remaining balance (minus the lenders' fees) when the invoice is paid by your customer.
Invoice factoring
Invoice factoring involves selling your invoices at a reduced price to a third-party finance organization known as a factor.
The factor typically collects payments directly from your customers and pays you an upfront percentage of the invoice amount (usually between 80-90%).
Once the factor has collected the full invoice amount, they deduct their fees and pay you the remaining balance.
B2B factoring can also you avoid the risks of non-payment and bad debt by transferring these risks to the factor.
What are the differences between invoice discounting and invoice factoring
Invoice factoring is when you sell your invoices to a factor who is responsibility for collecting payment from your customers. Invoice discounting is when you use your invoices as security for a loan whilst you maintain responsibility for them.
Invoice factoring tends to be more expensive than invoice discounting because the factoring company assumes a higher level of risk by purchasing your invoices. However, in some cases, can also free up your resources and help improve your collections process.
6. Other
Non-bank cash flow lending is a type of unsecured loan repaid with your company's incoming cash flow.
Recurring revenue lending is where a lender provides you with financing based on your predictable and recurring revenue streams. It's often used by startups and small businesses that have steady revenue streams but not significant assets to use as collateral.
Debenture is a long-term, unsecured debt instrument issued by a company to raise funds from investors.
Mezzanine financing provides a company with access to capital that is not secured by collateral. It sits between the categories of debt and equity and is typically to fund expansion, acquisitions, or other major projects.
Embedded financing
Embedded finance refers to the integration of financial services into non-financial platforms or products. It enables your customers to access financing options seamlessly at the point of sale (POS).
It is a similar concept - perhaps even an evolution of - embedded payments.
By embedding B2B lending into your platforms, you can provide customers with access to financing easily and quickly.
Summary
B2B financing involves loans and credit for companies serving other businesses.
It covers a wide spectrum of financial products that can increase your working capital, facilitate your business expansion, and manage your risks.
The specific steps needed to gain it can vary based on the company's eligibility and the chosen solution. But the primary process includes the application, approval, funding, and repayment.
There are three main categories of B2B financing providers:
- Traditional banks
- Credit unions
- Alternative lenders
Each of these has its advantages, approval rate rates, and cost structures.
On the other hand, providing B2B financing to business customers can increase average order volume, customer loyalty, and provide insights into customer behavior and market trends.
There are several main types of B2B financing, including:
- Business loans
- Venture debt financing
- Trade credit
- Equity products
- Invoice financing (including discounting and factoring)
Other options include non-bank cash flow lending, recurring revenue lending, debentures, and mezzanine financing.
B2B financing is increasingly being embedded at the point of sale. This gives you or your customers easy and quick access to it.
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