Freeing Working Capital: Solving the $1 Trillion Problem with B2B BNPL

Working capital is the lifeblood that fuels day-to-day operations and propels growth. Whether you run a thriving enterprise or a promising SMB, the efficient management of working capital can spell the difference between success and stagnation. 

And while working capital loans have been a conventional recourse to access necessary funds, emerging technology now offers innovative solutions that redefine that landscape. 

B2B BNPL (Buy Now Pay Later), for example, offers much needed access to tied up working capital thanks to upfront payments for a healthier cash flow

In this article we’ll be taking a closer look at how B2B BNPL can empower businesses to unlock their tied-up working capital and propel themselves towards sustainable financial success.

Table of contents

  1. What is working capital? 
  2. The importance of working capital
  3. How do you calculate working capital? 
  4. The state of working capital for SMBs
  5. What is a working capital loan? 
  6. 4 ways to access tied up working capital
  7. How is B2B BNPL redefining working capital loans? 
  8. What makes B2B BNPL unique? 

What is working capital?

Working capital, often referred to as net working capital (NWC), serves as a vital financial indicator, reflecting the difference between a company's current assets (comprising cash, accounts receivable, and inventory) and its current liabilities (including accounts payable and debts). As a widely adopted metric, it provides valuable insights into an organisation's short-term financial well-being.

Keeping a healthy working capital is crucial for businesses. When maintained properly, bills are paid on time and everyday expenses are easy to manage. It also means that you can jump on exciting growth opportunities that may come your way. By making sure your working capital game is on point, you're setting yourself up for financial success in the long run.

The importance of working capital management

The effective management of working capital ensures that a business can function smoothly without facing cash flow gaps or being burdened by excessive debt. Here are some key reasons why working capital management is super important for SMBs:

Liquidity and Efficiency: Efficient working capital management ensures you have enough liquid resources to meet your short-term obligations promptly. This includes paying suppliers, covering payroll, and settling other operational expenses in time. 

Having adequate liquidity enhances operational efficiency by preventing disruptions due to cash flow gaps. It enables you to maintain a positive relationship with suppliers and creditors, thus avoiding late payment penalties and potential supply chain disruptions.

Cost Minimisation: Managing working capital effectively reduces the need for you to rely heavily on external financing, such as loans or credit lines. By optimising your cash flow and capital utilisation, you can minimise interest costs and the burden of servicing excessive debt. This cost-saving approach helps preserve financial resources, allowing you to allocate funds to more productive investments and growth opportunities.

Capital for Growth: A healthy working capital position provides the necessary financial backing for you to capitalise on growth opportunities. Whether it's expanding product lines, investing in marketing campaigns, or upgrading technology and equipment, having sufficient working capital reduces the dependence on external funding sources. 

This autonomy gives you the freedom to pursue growth initiatives without incurring additional debt, fostering long-term sustainability.

Risk Mitigation: Uncertainty and risks are inherent when running a business. Maintaining a strong working capital position acts as a buffer against unforeseen challenges. When facing economic downturns, industry-specific fluctuations, or unexpected expenses, businesses with a solid working capital cushion can weather the storm more effectively. This risk mitigation strategy provides stability and resilience, preventing you from being caught off guard and enabling strategic decision-making.

Supplier Relationships: Managing working capital efficiently allows you to make prompt and timely payments to suppliers. Timely payments build trust and credibility, leading to improved supplier relationships. Strong relationships with suppliers can result in better negotiating power, potentially securing more favourable credit terms or discounts for early or bulk payments. These benefits further enhance your business’s financial performance and strengthen your position in the market.

How do you calculate working capital?

Calculating working capital is actually pretty straight forward; 

Current assets minus current liabilities. Anything in your business that can be converted into cash within a year is a current asset. Anything that's due within a year is a current liability.

Working capital = current assets - current liabilities.

The state of working capital for SMBs

Small to medium businesses selling on trade credit have always had a hard time with managing working capital. Selling on net terms means waiting for payments and when your pockets aren’t as deep as a global enterprise, paying those bills can be tough.

To make matters x10 harder, the impact of COVID put the financial health of SMBs under even more strain. In fact, a quarter of SMEs have prioritised just surviving in 2023

As traditional forms of financing are becoming harder to secure, SMBs are feeling the full force of tightened purse strings, further complicating day to day operations and future growth.

As Corrie Evans, President and CEO of the Association for Enterprise Opportunity (AEO) says, “Banks don’t seem to think that a $250,000 loan or less is worth it to them. It’s too costly, and these business owners don’t have the collateral and other kinds of documentation and assets that traditional financial institutions are seeking.”

Bernado Martinez, Vice President of Global Merchant Lending at PayPal echoed those concerns, saying “The reality is that capital access is roughly a $1 trillion dollar problem around the world.” Ultimately these limitations experienced by SMBs result in major issues with cash flow and business growth.

What is a working capital loan?

If, like many businesses, you’re struggling to manage your working capital, you can turn to working capital loans.

Simply put, a working capital loan is a type of short-term financing that businesses can use to cover their day-to-day operational expenses, such as payroll, inventory replenishment, and utility bills. 

This loan helps ensure the smooth functioning of a company's operations by providing the necessary funds to bridge gaps between revenue generation and immediate financial needs. 

So how do you manage working capital with these types of loans? And what are the pros and cons?

4 ways to access tied up working capital

Bank overdraft

A bank overdraft can be used as a short-term working capital solution, giving you the flexibility to manage cash flow fluctuations and meet urgent financial needs. However, it's essential to use overdrafts wisely, as they often come with higher interest rates and fees.

Short term business loan

Taking out a short-term business loan is a common method to access working capital. These loans are typically for a fixed amount and have a defined repayment period, making them suitable for financing immediate needs or seizing short-term business opportunities. However, interest rates and terms may vary depending on the lender and your creditworthiness.

Equity funding

Equity funding involves raising capital by selling ownership stakes in your business to investors. This could be in the form of angel investors, venture capital firms, or even friends and family. While equity funding does not require repayment like a loan, it means sharing ownership and profits with investors. This option is more suitable for businesses with high growth potential looking for long-term financial support.

Invoice financing and invoice factoring

Both invoice financing and invoice factoring have their pros and cons:.

  • With invoice financing, a lender advances you a percentage of the value of your receivables - as much as 90%. Once your customer pays their invoice, you receive the remaining balance minus a lender’s fee.

    Lender’s fees can vary depending on the financing company but generally they’re between 1-5%. Bear in mind though, that the amount you pay in fees is based on how long it takes your customer to pay their invoice. The longer they take, the more expensive it is for you.
  • Invoice factoring is an external, short-term form of financing where a business sells its outstanding invoices to a third-party factoring company. The factoring company takes over the responsibility of collecting payment and provides you with a percentage of the total invoice value (usually between 80%-90%). 

Once your customer pays the invoice, the factoring company then returns the rest of the invoice value minus a fee.

How is B2B BNPL redefining working capital loans?

The traditional working capital loans listed above are what businesses have used for years to access that tied up working capital. But let’s think back a second to why you might need working capital loans in the first place. 

If, for example, you sell on trade credit, you’re putting yourself out of pocket until you receive payment for the products or services you sell. And until you reach that point, you’re funding all your financial obligations from your own pocket.

More recently, however, a new type of trade credit selling has been making waves across multiple (if not all) industries. B2B BNPL.

B2B Buy Now Pay Later (BNPL) is a payment method that utilises newer technology like embedded finance and automatic payment reconciliation that help to solve the pain points of traditional trade credit.

So how does this affect working capital access? Here are some of the unique features of B2B BNPL and how it’s changing the game for both SMBs and enterprise level companies.

1. Increased Sales and customer base: B2B BNPL makes purchasing more accessible for buyers, leading to potential increases in order volumes. Sellers can also tap into a broader customer base, including businesses that might have faced financial barriers or hesitations in the past. This can result in improved revenue streams for you.

Take Purple Planet, for example. 95% of Purple Planet’s customers are businesses and before using Two, the vast majority of transactions were processed through card payment.

By implementing the Two Checkout, Purple Planet was able to offer their customers a quick and easy B2B checkout solution. In fact, they saw  a 400% increase in average order value!

2. Upfront payments: If you sell on trade credit, you’ll often deal with delayed payment cycles. With B2B BNPL, you receive payments upfront from the BNPL provider (like Two), allowing you to access funds sooner. This accelerates your cash flow, enabling better management of operational expenses and investments.

Receiving upfront payments for trade credit sales should not be understated. Ultimately, it fixes the $1 trillion working capital access problem. As Nivi Jasa from I AM NUT OK says “Two is helping us streamline our online B2B orders and cash flow operations. Every time an order is placed and processed, we get paid”. 

3. Reduced Risk of Non-Payment: B2B BNPL platforms usually assume the responsibility of ensuring buyer payments, mitigating the risk of non-payment for sellers. This assurance allows you to focus on your core business activities without constantly chasing down payments or dealing with bad debts.

For Kandidate, that meant saving 15 hours of manual work a week from their business. Two customers!

4. Enhanced Relationships: By offering a B2B BNPL, you can cultivate stronger relationships with your buyers. The availability of flexible payment options fosters goodwill and loyalty. Additionally, you can work collaboratively with buyers to find optimal payment schedules that suit both parties, contributing to long-lasting partnerships.

5. Streamlined Operations: B2B BNPL platforms like Two integrate seamlessly into your existing systems. This streamlines order processing, payment reconciliation, and customer onboarding to help reduce administrative burdens. Sellers can allocate resources more efficiently toward value-added tasks instead of dealing with payment-related hassles.

8. Customizable payment terms: Any BNPL B2B provider worth their salt allows you to customise payment terms that align with your revenue cycle and business needs. This flexibility ensures that the payment arrangement benefits both you and your buyers, contributing to smoother financial interactions.

With Two for example, transparent and flexible payment terms give you the ability to set custom payment terms per buyer.

9. Improved Cash Flow Predictability: Predictable payment schedules through B2B BNPL improves your ability to forecast your cash flows accurately. This predictability enables better decision-making regarding inventory management, expansion plans, and other strategic initiatives.

As a result of these functions, B2B BNPL ultimately removes the need for traditional working capital loans. Upfront payments and improved cash flow forecasting allows you to access previously tied up working capital and as a result, run a financially healthier business!

What makes B2B BNPL unique?

So how does B2B BNPL compare to over forms of working capital loans? Let’s take a look at the cash flow, flexibility, and sales uplift elements of B2B BNPL vs the traditional working capital loans to get a clearer picture.

B2B BNPL vs bank overdrafts

With bank overdrafts, there is a level of short-term cash flow relief. But often, the interest rates make it an expensive choice. Additionally, there are no real sales benefits to this form of bank overdraft.

B2B BNPL on the other hand is considerably cheaper. Additionally, B2B BNPL makes it easier to attract new buyers as you’re offering preferential purchasing terms that work for them.

B2B BNPL vs short-term business loans

Short term business loans can be useful. But with fixed repayment terms, they can be somewhat tricky to manage. After all, a short-term business loan is just that - a loan. With B2B BNPL, there’s no need for loans, as you’re being upfront for your sales.

Business loans are typically quite time-consuming too and usually involve lengthy applications. Of course, none of that is needed with B2B BNPL…

B2B BNPL vs invoice factoring

Lastly, we have invoice factoring. Used by more than 45,000 businesses in the UK alone, it can be a useful way of accessing tied up working capital. But it comes at a cost, both financially and in terms of time.

We wrote about invoice factoring in a previous article (that you should check out) but to sum up here, you can think of invoice factoring as reactive and B2B BNPL as proactive. As a seller, you don’t have to collect payment in the first place because integrated financial partners handle it through their B2B BNPL platform. 

With traditional invoice factoring, there can also be discrepancies between the credit risk established by the seller and what invoices the lender is willing to buy. For example, a seller may offer trade credit after running credit checks, but the lender may still deem the risk too high to finance.

B2B BNPL solves this issue by making the credit decision at the checkout instead of after the sale. Additionally, dynamic credit limits based on the customer's risk profile make B2B BNPL a superior option. Merchants can access credit limits in real-time thanks to advanced credit engines built into the B2B BNPL platforms, creating a streamlined invoice financing option.

If you’d like to learn more about how Two can help you improve cash flow, increase B2B sales, and grow your business, make sure to speak to one of our experts!