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Trade credit insurance

Among the many financial products available to B2B merchants, Buy Now, Pay Later (BNPL) and Trade Credit Insurance (TCI) are two of the most popular. This quick guide delves into the critical differences between BNPL and TCI so merchants can understand the purpose, capabilities, and associated benefits inherent to each product.

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later BNPL is a type of short-term financing that allows buyers to make purchases and pay for them later. Rather than an immediate upfront payment, buyers are granted a payment window, typically 30 to 90 days, to settle the owed amount, occasionally accompanied by interest or fees. Repayment can take the form of installments or a lump sum at the end of the designated payment period.

Merchants can offer BNPL options in-house or through an external provider. To manage BNPL in-house, merchants need to have the financial and operational setup in place, from credit and fraud risk, which ensures they minimise the risk of defaults to the operational work associated with collections. Such BNPL services are typically extended to established buyers rather than to the entire customer base, especially not new customers.

Given the operational complexities and risks involved in offering BNPL in-house, many merchants partner with a third-party BNPL service provider. In this arrangement, the BNPL provider pays the merchant upfront for the purchase when a sale occurs, and the customer agrees to repay the provider per the agreed-upon payment terms.

Working with a BNPL provider brings several advantages for merchants. One noteworthy benefit is the ability to extend pay-later options to all buyers, backed by the provider’s credit and fraud checks. Beyond this capability, BNPL providers also safeguard merchants from payment defaults and take on the responsibility of debt collection, alleviating merchants from the challenging task of pursuing overdue payments. In addition, BNPL providers help to significantly reduce the operational and administrative burdens of managing Accounts Receivable (A/R). Some providers also offer a streamlined solution that works across online and offline sales channels and can facilitate cross-border commerce.

What is Trade Credit Insurance (TCI)?

Trade credit insurance (TCI) is a type of insurance that protects businesses from financial losses if a customer fails to pay for goods or services that they have purchased on credit. Providers conduct assessments on new buyers to determine coverage terms and continuously monitor risks for merchants, with some providers also offering an in-house accounts receivable finance function.

Generally, merchants with trade credit insurance are perceived as having lower credit risks, resulting in more favourable lending and supply terms for themselves. This strategic advantage allows merchants to provide open credit terms even when their competitors cannot.

This type of insurance is particularly beneficial for merchants with a significant number of repeat customers, enabling them to extend pay-later options. Today, TCI is primarily used by large merchants and is prevalent across major industries such as food and beverage, automotive, IT and telecommunications, energy, and healthcare.

Key differences between Trade Credit Insurance and BNPL via an external provider

Feature External BNPL provider  TCI (Trade Credit Insurance)
Purpose  Offer deferred payment options to buyers while protecting sellers from payment defaults.  Protect businesses from the risk of non-payment by their customers. 
Upfront payment  Yes No 
Costs  A percentage of the transaction value A percentage of a merchant’s insured sales volume
Real-time decisions  Typically yes Typically no 
Fraud protection  Built-in fraud checks and protection Typically no
Integration  Seamless within the checkout  Not integrated. 

Purpose

  • BNPL: At its core, BNPL is a buyer-facing tool that merchants use to provide more favourable payment terms to their buyers, helping them to close deals. With an external BNPL provider,  there is a broader purpose – to protect merchants from defaults and secure their cash flow.
  • TCI: TCI protects businesses from the risk of non-payment by their customers. This can help businesses avoid financial losses in the event of customer defaults.TCI offers no additional advantages like upfront payments.

Upfront payments

  • BNPL: Merchants receive the full payment upfront from the BNPL provider, regardless of when the customer settles their installments. This eliminates cash flow concerns and boosts liquidity.
  • TCI: No upfront payments. Merchants have to wait for the customer to pay, potentially straining cash flow if payments are delayed.

Costs

  • BNPL: Merchants typically pay a percentage of the transaction value to the BNPL provider for each financed transaction. This percentage is contingent on the chosen net terms or installment plan and may be absorbed by the merchant or passed on to their buyers.
  • TCI: Premiums based on a customer’s creditworthiness and the risk involved. This can range from 0.10% to 0.50% of a merchant’s insured sales volume, making it a significant expense, especially for high-risk customers.

Real-time decisions

  • BNPL: Streamlined and automated. Most BNPL providers offer instant approvals, making them ideal for closing deals on the spot and minimising friction in the checkout process.
  • TCI: Requires a more involved process. It typically involves applications, credit checks, and policy setups, making it less suitable for single transactions or impulsive buying.

Fraud protection

  • BNPL: Most BNPL providers offer built-in fraud checks and protection, reducing the administrative burden for merchants.
  • TCI: Providers typically don’t include fraud protection. This means merchants still need to conduct their own risk assessments and manage fraud prevention.

Integration

  • BNPL: Seamlessly integrates with a merchant’s existing checkout process, providing a smooth customer experience.
  • TCI: Not integrated into a merchant’s checkout. Requires separate application workflows, credit checks, and policy setups.

Experience B2B BNPL risk-free

There’s no need to weigh the trade-off between enhancing sales through Buy Now Pay Later and safeguarding your business. Mondu equips merchants with the means to increase sales and acquire new customers while providing robust protection against non-payment risks. To learn more about our B2B BNPL solutions, contact us at sales@mondu.ai or request a demo.

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