Over the past five years, you may have noticed a new option when you’re shopping online: you can pay for your total purchase over time rather than all at once when you make a purchase. This option is better known as buy now, pay later, and it’s become a massive industry in just a short time, worth more than $90 billion globally.
While buy now, pay later apps are now a mainstay for both online and in-person commerce, there are still many questions on how these programs can be offered for free and how to account for purchases made through them. While they present an interesting opportunity to grow your business, it’s important to consider their long-term impact.
Before you consider buy now, pay later for your small business, here’s what you need to know about how it can impact you and your customers.
Using buy now, pay later as a loan
Did you know that when your business makes a purchase using buy now, pay later, you’re taking out a loan?
Unlike traditional term loans that are structured with monthly payments and accrue interest, buy now, pay later is a loan with just a small, handful of equal payments and no interest accrual.
But aside from this small difference, buy now, pay later purchases have the exact same impact on your business’s financial health as any other loan. When your business borrows money through buy now, pay later to pay for fixed assets, your total assets and liabilities on your balance sheet increase at the same rate. When your business uses buy now, pay later to cover expenses, your equity goes down and your total liabilities go up by an equivalent amount.
On the surface, buy now, pay later seems like a win for your small business to make larger purchases. No interest is charged, and big-ticket purchases can be broken up into more affordable payments. But like all debt, it comes down to how much you can afford, how you’re using the money, and what happens if you can’t pay.
One of the reasons that buy now, pay later has become such a hot offering in fintech is that it isn’t regulated like regular consumer debt, so it can be offered easily and quickly. But without that regulation, buy now, pay later companies aren’t required to do the extensive review of a traditional lender to make sure you can afford the debt. The companies offering buy now, pay later aren’t looking at your whole credit exposure like a credit card lender or a bank would when you apply for financing.
Because of this, your business can go on making purchase after purchase using buy now, pay later with no one monitoring your increasing payments across all your purchases. It’s easy to get into a situation where your business has borrowed more than it can pay. While buy now, pay later generally doesn’t require much for credit verification, if you miss a payment your delinquency will be reported to the credit bureaus.
It can be helpful to use buy now, pay later to purchase income-generating assets, or pay for operational costs that will grow your revenue. In reality, though, most purchases through these services are for non-critical items that don’t add to your business’s asset value and aren’t related to growing your business. Each of these discretionary expenses decreases your business’s equity value, which can be hard to see when your business’s cash is temporarily preserved. Be sure to consider how the purchase will contribute to your income before you use buy now, pay later for it.
Since buy now, pay later is still a new option, many internal accountants and bookkeepers aren’t familiar with tracking this type of debt. They might struggle to properly record it, especially when your business makes multiple installment purchases through the same app.
Internal accountants must track many credits and debits against your business’s payment app liability account. This can be challenging when your principal balance is recorded in the buy now, pay later app, and your accountant or bookkeeper doesn’t have access to it. As a result, you might not have your business’s full debt represented in your financial statements.
While buy now, pay later programs are promoted as “zero-interest,” that’s only the case if you don’t miss a payment. The interest you incur with late payments can be up to 30% APR, plus other penalties and fees, which are common. In 2023, almost one-third of buy now, pay later users have made late payments at least once, and the fees can go up to 25% of the original purchase price. So in reality, what seems like a zero-interest option can quickly become a major expense.
Should I offer buy now, pay later through my small business?
Offering buy now, pay later can convert more customers, especially if you sell high-ticket items or need to increase your prices. A 2021 report by RBC Capital Markets found that businesses offering buy now, pay later can increase conversion rates by 20%-30% and increase average revenue per customer by 30% to 50%.
Remember, though, this benefit comes at a cost. Your business will typically pay between 1.5% and 7% for each transaction that is financed through buy now, pay later. Offering this option needs to be done through your credit card processor, so you should reach out to them to learn more before diving into this offering. For example, Square partners with AfterPay, and Stripe partners with Affirm, AfterPay, Klarna, and Zip. With fees at that level, you need to look at your gross profit margin to determine if it’s worth it for your business. If your business has low gross profit margins, these fees can make them even lower. For example, if your business has a 30% gross margin, you would need to sell 31% more of your products and services just to cope with the 7% buy now, pay later fee.
If your business has a high margin, you’ll be much less affected. For example, if you have a 65% margin, you need to sell just 12% more to cope with the same 7% buy now, pay later fee. Keep in mind that as the pricing of your products and services increases, there are alternate marketing tools that could be just as effective as buy now, pay later.
Offering buy now, pay later to connect with Millennial and Gen-Z consumers
Research by the Consumer Financial Protection Bureau indicates that Millennial and Gen Z consumers prefer having the option of buy now, pay later when they shop online. But with consumer debt soaring in the U.S., and consumer income in these generations starting to slide, these financed purchases will quickly become unaffordable.
The temporary benefits of offering buy now, pay later often don’t outweigh the long-term impacts. If your customers can’t afford to pay back their purchases, your business won’t be able to hit your targets and cover the costs of your expenses.
Pursuit can connect you with the right resources to achieve your goals
Whether you need working capital to take advantage of a new opportunity or need expert consulting to create a new business strategy, Pursuit can work with you to take your business to new heights. We offer more than 15 different business loan programs for nearly any business need, as well as business advisory services to give you a boost. When you’re ready to take the next step, get in touch with us to learn what’s possible.
