In the business-to-business (B2B) commercial environment, sales volumes are high and payment terms are long.
This makes issues like securing funding or managing cashflow a challenge.
The B2B lending industry has grown considerably in recent years.
The are many options available for business customers to use themselves, or offer their customer base. Options are available for small businesses to larger businesses.
Let's look at one of the most popular categories: B2B loans.
What is a B2B loan?
A B2B loan is money provided by banks or alternative lenders to businesses working in the B2B category.
Like other loans, B2B loans often have a fixed interest rate and repayment period. These are based on the potential risks and rewards that a loan brings for the business purpose it will be used for.
Business loans given to B2B businesses can fall under the definition of B2B loan, too. However, many business loans are for business-to-consumer (B2C) businesses, which don't fit the definition of B2B loan.
In other words, not all business loans are B2B loans, but all B2B loans are business loans.
What are the differences between B2B loans and B2B financing?
B2B loans are often confused with B2B financing, which is a similar category of financial product.
B2B Loans and B2B financing (see below, 'B2B loan alternatives') are similar in many ways. But there are also some key differences.
1. Purpose
The main difference between B2B loans and B2B financing is that the former are usually borrowed for a specific purpose such as funding a digital transformation project, but the later can be used in a more open-ended or general way.
The application process for loans requires more information, which includes information on what the loan will be used for. (See below, '5. Accessibility').
2. Provider
Loans are also typically provided by a traditional bank or credit union, whereas financing often comes from alternative lenders or investors.
Alternative lenders to the business world include a range of challenger banks, neobanks, lending platforms and other specialist fintech and payments businesses.
Thanks to innovation in regulation (like open banking) and technology, they are able to offer unique lending solutions that can be more attractive than those offered by traditional lenders.
A primary benefit is that alternative lenders can significantly decrease loan turnaround time compared to services provided by big banks.
Research by the British Business Bank estimates that challenger banks total share of the lending market in the UK was 48% in 2021/22.
3. Repayment terms (instalment credit vs revolving credit)
Loans are a type of instalment credit, whereas financing is a type of revolving credit.
Instalment credit repayment is set at a specific period(/s) while revolving credit is often ongoing and involves borrowing smaller amounts at more frequent intervals.
4. Cost
The average cost of each type of loan and financing solution varies. Different suppliers might offer different rates, which can vary, depending on your (or your client's) credit history.
But generally speaking, loans are cheaper than financing solutions.
5. Accessibility
Financing often requires less stringent qualifying criteria and has a higher approval rate and faster onboarding process than loans.
In some cases, alternative lenders don't require credit checks for your company. However, they may want to check your sales ledger and clients' credit ratings.
Either way, businesses can often gain quicker access to financing from an alternative lending source than a traditional bank.
B2B loan vs B2B financing approval rates
B2B loan approval and rejection rates vary between markets, industries and businesses. However, it is still worth noting the average rejection and acceptance rates.
These can vary depending of factors such as whether applicants are smaller businesses or large corporations.
For example, in the UK, data shows that between back in 2018 the rejection rate for SMEs looking for business loans was 17 percent.
In 2021, the highest rejection rate in Europe was found in Lithuania, where 29 percent of SME loans were rejected.
Market trends suggest that approval rates vary between big and small banks. Research shows that small businesses' average approval rate from big banks is 14.3%, yet from small banks it is 20.1%.
6. Flexibility
Loans are generally straightforward but relatively rigid financial solutions.
The repayment terms are fixed early on. They are based on a businesses' credit approval and remain in place throughout the agreed lending period.
There are many many flexible financing options, on the other hand, that enable more scope for increasing (or even decreasing) the amount borrowed.
Part of this is down to revolving credit terms, which don't have to answer the following questions from the outset:
- How much exactly will be borrowed during the course of the relationship between lender and borrower?
- Will this amount change?
- How long will the lender and borrower relationship last?
Of course, in some cases, certainty around these issues is favorable. But in others, it is not and businesses can be reassured that quick access to cash flow is at hand during uncertain periods.
7. Implications for your credit
Just as cost can be seen as the other side of the coin to flexibility, credit implications can be for accessibility.
In other words, a lack of a good credit rating might be a hurdle to getting a loan, but successfully repaid loans can build your credit rating.
The same is only sometimes true for financing - it depends on which financing provider and solution is used.
The different types of B2B loans
1. Traditional business loans
A business loan is a sum of money lent to a business for operational expenses or other business needs.
It usually involves borrowing money from a traditional bank or credit union. They will first carefully assess a company's creditworthiness, cash flow capabilities, and a detailed breakdown of what the loan is going to be used for.
After making their loan calculations, lenders might offer different rates for B2B and B2C companies. However, they will also offer different average rates for specific industries and different companies.
2. Invoice Financing
Invoice financing (also known as accounts receivable financing or invoice discounting) is a B2B lending service where unpaid invoices are used to secure loans from third-party providers.
The financing provider provides between 75 - 90% of the value of your invoices up front, giving you access to working capital. Once the client pays you the entire invoice, you pay back the value of what you borrowed and the fee for borrowing it.
Confusingly, it is a type of invoice finance, which is an umbrella term for both invoice financing and invoice factoring.
Invoice factoring is a similar solution, except in that it hands over the collections process to the factoring provider (factor).
This means that invoice factoring essentially involves selling you invoices to a third party, whereas invoice financing is a kind of loan that uses your invoices as collateral.
B2B loan alternatives
The alternative to B2B loans is B2B financing. There are many different types of this in the lending business.
These include equity financing, debt financing, venture debt, trade credit, invoice factoring, and more.
Each of these B2B financing options offer specific advantages and disadvantages.
For example, venture debt financing helps new companies quickly find financial backing and cashflow. However, it also signs away a part of the business to investors.
Integrate B2B loans and financing with your existing processes
Offering clients embedded finance solutions and banking services can help you achieve greater loyalty, higher average order volumes and increased revenue.
Being able to integrate this offering with your existing payment processing solution is essential. As with payments solutions more broadly, seamless financing solutions can be among the most strategic value-added services, reducing abandoned carts and improving the customer experience.
At Nuvei, we offer payment acceptance solutions for both traditional and online-based lenders.
Conclusion
A business loan is a great way for companies working in the B2B space to secure funding for a specific project or improve cash flow.
They can be utilized directly or even offered to your clients via a third-party B2B lending partner.
B2B loans are a type of business loan. There are two main types of B2B loans: traditional business loans and invoice financing.
B2B loans are often confused with B2B financing solutions, but there are some important differences between the two financial models.
Like bank loans in general, B2B loans are usually given over fixed periods for set rates. Financing, on the other hand, is a type of revolving credit that can be increased or decreased when needed.
Businesses now have more choice of how to access and utilize funding. B2B lending specialists and platforms now strongly compete with traditional banks and financial institutions.
The former usually have stricter qualifying criteria and lower acceptance rates, but can cost less.
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