A guide to personal guarantees for business borrowing

Buy Now Pay Later schemes (BNPL) could help businesses secure more sales.

This guide outlines the benefits and the potential drawbacks to bear in mind.

Buy Now Buy Later (BNPL) schemes, which allow customers to delay full payment for products or services, are growing in popularity among UK businesses due to the potential for encouraging customers to make a purchase.

Research by Statista showed that the use of BNPL increased by 400% globally between 2019 and 2021, while data from Finder.com found more than 19mn consumers in the UK have used BNPL services.

To use BNPL, a customer selects the option during an online checkout.

The BNPL provider makes a soft credit check, and if approved, the customer pays a percentage of the total price, with the remainder set up as interest-free instalments.

If a customer misses a payment, they are charged interest and may incur a late payment fee.

Businesses are charged a fee for each completed transaction – usually between 2% and 8% of the total amount.

Benefits of BNPL schemes

There are a number of potential advantages of offering BNPL, from increased sales to more effective marketing.

Increased sales

Customers may make a purchase they might otherwise not be able to afford.

This is particularly true during tough economic times when consumers may forgo a purchase if they have to pay the total price immediately.

As a result of offering BNPL, businesses may increase overall sales.

Higher average order values

If customers are able to break up the cost of purchases into more affordable monthly instalments, they may be more likely to purchase higher-value items or increase the quantity of goods or services they buy.

Improved cash flow

If you increase sales and average order values, you may benefit from more money coming into your business, which may help to improve your cash flow and working capital.

Enhanced customer loyalty

If customers know you offer a flexible payment option, they may be more likely to make another purchase with your business and recommend your products or services to other people.

Marketing benefits

Businesses can use BNPL in marketing campaigns to encourage sales.

Offering BNPL may encourage a customer struggling to decide whether to make a purchase and may help differentiate your business from competitors.

Drawbacks of BNPL schemes

Although BNPL has several benefits for businesses, it’s essential to acknowledge the drawbacks.

Customers defaulting on payments

By not taking full payment when the purchase is made, you risk a customer defaulting on future instalments.

Although the BNPL provider will carry out a soft credit check, there is still a chance future payments may not be made.

This could harm your cash flow and may be an eventuality you must budget for.

Impact on cash flow

By not taking full payment from customers who use BNPL, you won’t receive the full amount for your products or services.

You may need to factor this in when forecasting cash flow, particularly if BNPL is popular with your customers.

Fees charged by BNPL providers

When a customer uses a BNPL scheme to make a purchase, the provider charges a business a fee, which is usually between 2% and 8% of the total transaction.

This adds extra costs that you have to account for.

If BNPL becomes very popular with your customers, it could have a negative impact on your cash flow.

Cost of integration

Integrating a BNPL scheme with your website has costs you may need to factor in when introducing it as a payment option.

The integration cost could be an issue if it doesn’t prove popular with your customers.

Government regulation

The UK government intends to introduce legislation for the BNPL industry, which could impact businesses using the schemes.

Choosing a BNPL provider

The most common BNPL solutions allow customers to pay in three or four instalments or within 30 days with no interest charged.

Example BNPL providers include:

• Klarna: Klarna claims to have 25 million UK customers. It offers ‘pay in 3’, pay in 30 days and financing of up to 36 months.
• Clearpay: Used by 19mn customers globally, Clearpay allows users to pay in four instalments over six weeks.
• Payl8r: Offering payment plans over 0-90 days, Payl8r says customers with limited credit history can use its service because it uses Open Banking to connect with bank accounts to view overall affordability.

Before selecting a BNPL provider, it can pay to do your research.

Ideas include searching online, looking at reviews, and asking other business owners for recommendations.

Compare fees and other terms and conditions to ensure the provider fits your business and customers.

Best practices for implementing a BNPL scheme

BNPL is increasingly popular and may offer many benefits for businesses looking to boost sales.

However, there are downsides a business owner may need to bear in mind.

There are ethical considerations, too, and businesses should consider how to promote responsible use among customers.

Failure to make instalments could harm a customer’s credit score, so it’s essential for them to be aware of this before using BNPL.

As BNPL becomes more popular, default payments may also increase.

This may affect the reputation of businesses that offer BNPL.