Are you considering offering buy now, pay later loans to your customers? It is a type of banking as a service that can be a great way to increase your sales by helping customers spread their purchase costs.
In this guide we explain how a buy now, pay later loans work and the pros and cons of offering them. We also answer common questions like “how do buy now, pay later loans work?” and “what are the pros and cons of offering buy now, pay later loans?”
Table of Contents
- What is a buy now, pay later loan?
- What are the pros & cons of offering buy now, pay later loans?
- How do I set up buy now, pay later loans?
- Frequently asked questions?
What is a buy now, pay later loan?
A buy now, pay later loan helps your customers to spread their purchase cost by delaying their payment or spreading it out over several months. It is a type of mini loan that is usually interest free to customers. Customers set up a lending agreement with the loan provider and your business receives cash straight away, minus your agreed lending fees.
Buy now, pay later loans are increasingly popular with small businesses. Many loan providers have products that are easy for small businesses to set up and operate.
- Customers can spread their purchase over 3 to 9 months
- Customers get access to interest free lending
- Lender processes payments and chase bad debts
- Your business receives payment immediately
- No credit checks for customers
- Currently unregulated market
How does a buy now, pay later loan work?
Buy now, pay later loans work by allowing customers to spread their payment, often over 3 to 9 months. For businesses these loans help them to grow their sales as customers don't need to delay making their purchases.
Here is how buy now, pay later loans work for customers:
- Customers make a purchase using your website or an invoice
- They set up an agreement with a lending agency.
- The customer pays the lending agency in instalments.
- Lending is usually interest free, although customers may owe interest, depending on the terms of your agreement.
- The lender chases up any bad debts if the customer defaults
Here is how buy now, pay later loans work for businesses:
- Your business sets up a credit agreement with the lending agency
- You link your business bank account and your website with the lending agency software
- You offer buy now, pay later as an option to customers
- When customers make a purchase, the lending agency pays you straight away, minus any fees
- The flat fee is usually based on a percentage of the transaction value which varies depending on the terms of your agreement
- If the customer defaults on their loan then the lender chases the debt. Your business won’t usually be financially affected, but check your terms and conditions.
How does buy now, pay later help businesses?
Buy now, pay later loans help your business by driving sales and helping customers to spread their purchase costs. Customers don't have to save up to make a purchase and can afford to pay for bigger items more gradually.
Offering buy now, pay later can also help you to stay competitive. This is especially important if you operate in a market where your competitors offer buy now, pay later loans.
Can B2B customers use buy now, pay later loans?
If you sell to other businesses, then offering buy now, pay later loans can be very helpful. Business customers with seasonal businesses may choose a buy now, pay later loan if they need to purchase stock a long time before they receive sales. Businesses sometimes use buy now, pay later loans as a cheap way of getting credit, so they can build up their stock. They can repay the loan later once they get into their busy period and make more sales.
Small businesses can use buy now, pay later like a small interest free business loan. If they are weighing up two suppliers, then offering buy now, pay later may tip the balance in your favour.
Pros and cons of offering buy now, pay later loans
Here are the main pros and cons offering buy now, pay later loans:
- Helps increase sales by helping customers spread their spending cost
- Enables you to remain competitive, if similar loans are offered by your competitors
- Helps business customers with seasonal sales
- Many lender charge simple flat fees
- Most lenders won’t charge you if a customer defaults
- Simplifies admin as lender deals with cash collection
- You get paid upfront
- Often no credit checks
- Can be expensive as fees typically range from 2% to 8% of the transaction
- Most lenders don’t disclose fees upfront so you’ll need to register to receive a quote.
- Will need to connect to the lender using accounting software
- Lose control of cash collection
- Customers may have to pay interest, depending on the terms of your agreement
- Some lenders don’t accept credit card payments so your customers will need to set up a direct debit.
- Some lenders have a single transaction limit which is typically around £5,000.
- Customers can find themselves defaulting on buy now, pay later payments due to the lack of credit checks. This may result in reputational damage for your business.
How do I set up buy now, pay later loans?
The application process for buy now, pay later loans varies depending on the provider. Most providers will ask to see the following information:
- Personal details so they can check your identity
- Information about your business, your turnover and type of sales.
Many lenders don’t disclose pricing information on their website. This means you’ll need to apply or register on their website to find out more information and receive a detailed quote. You will also need to link you accounting software to the buy now, pay later lender.
Where to find buy now, pay later loans
Here are some providers of buy now, pay later embedded finance loans:
Frequently asked questions
Offering buy now, pay later won’t affect your credit score as the customers’ contract is with the lender. Any loan default will affect the customer’s credit rating rather than your business.
There are no interest rates on buy now, pay later loans, but you’ll be charged fees instead. These fees vary between 2% to 8% of the transaction cost. However, you may also save some money as you will receive money up front from the lending company. You won’t need to chase up customers who haven’t paid on time. This may reduce your admin costs and also bring down your debt write-offs.
If a customer defaults then the lender is responsible for chasing for payment. Most lenders will attempt to contact the customer and give them a certain amount of time to settle the debt, before it is passed to a debt collection agency. Most buy now, pay later lenders pay businesses up front so you won’t take a hit if a customer defaults.
This depends on the terms of your agreement. Some lenders require you to refund the customer directly whereas other lenders sort out the admin, cancel future payments and refund your customers. Check your terms and conditions for details.
You may be able to offer buy, now pay later loans as a new business. Lenders will assess your application based on your turnover and the industry you operate in.
It’s worth shopping around a buy now, pay later loans vary considerably in cost between 2% to 8% per transaction. Many lenders don’t disclose fee information on their website so you may need to contact customer service or start the application process to receive a quote.
Buy now, pay later loans are currently unregulated. This may change as the Government is currently consulting on whether they should regulate the industry.
Buy now, pay later lenders have come under recent criticism because some consumers are racking up large levels of bad debt they can’t afford to pay.
Buy now, pay later loans can be confusing for consumers as it is possible to have a large number of different loans with various payment dates and amounts owing. This, combined with the lack of customer credit check means that there’s a risk customers take on debt they can’t afford.