B2B payments are the exchange of currency for goods or services between two businesses. This is an inter-commerce transaction that does not involve a consumer. Businesses include corporations, retailers, wholesalers, and start-ups to name a few.
An overview of B2B Payments
The buying and selling process between businesses have their own inner workings. An understanding of business-to-business (B2B) payments and procedures helps to decipher best practices for current trends, and the changing landscape that will utilize digital options. Business buyers require different types of goods for different requirements, while sellers have a complex internal processing system that accommodates higher sales and quantities. Payments must go through channels unique to transaction requirements.
How does electronic B2B payment processing work?
Business payment solutions vary according to the needs of each company. Electronic processing is the main transaction mode for B2C business, however, the majority of businesses today still rely on paper checks and Automated Clearing House (ACH) transfers. The rooted procedures and systems that have been in place are difficult to redefine for electronic transactions. For business exchanges, electronic processing still isn’t cleanly streamlined.
However, recent demand and innovation encouraged a recent shift to business payment systems. This becomes more critical for the growing global e-commerce industries. Any payment system must include necessary steps to the company’s payment cycle (see next section). A payment gateway is set up for the business to handle all types of transactions, all of which must go through the established cycles.
B2B Payment Cycle
Companies that opt to use an in-house Accounts Receivable team allows the most control over the transaction, but also has the most manual work. In this scenario, after the purchase is initiated from one company to another the seller must approve the sale and its terms. Business accounting comes into play, including issuing a purchase order and sending it through each party’s appropriate channels. Upon approval, the order is processed. An invoice is generated and then sent to the buyer for payment, typically within 30 days. To execute payment, electronic invoicing is on the rise - in Latin America, over 90% of businesses use digital invoicing. The final step is payment that includes a receipt, or, in some cases a late fee is applied.
Outsourcing is a popular business payment solution. Many companies will hire a company to follow through the steps above, which oftentimes makes for a faster process overall. This requires extra overhead and a relationship with the outsourced company to ensure good practices.
Automation is an efficient way to process a payment cycle without too much interaction. An automated system will do all the work using software and innovative technology without having to pay as much attention to the process. This is a rising trend in the business payments market, cutting processing time by up to 80%.
How are B2B payments are different from consumer payments
B2C payments are much simpler than B2B transactions. As explained above, B2B processing tends to entail large quantities with a higher bill. The process is complex and takes a substantial amount of time to complete. B2B transactions are often done on a regular basis. That is, the purchaser tends to repeatedly require the seller’s service or products, meaning transactions happen on a consistent schedule. This allows the ability to reduce some of work involved in completing the payment cycle since a vendor will already be integrated into the system.
With a B2C transaction, the process is very different. Consumers purchase in person or online, and they usually pay at the point of sale. That is, the money is exchanged up front or at the very moment the goods or service is rendered. This is possible because of digital systems that can quickly do an authorization on a single purchase at a lower cost. There is no internal processing that has to happen with a B2C transaction, it is a simple immediate transfer of funds.
How do recurring online payments work?
Similar to single transactions, B2B recurring payments are more complex than their B2C counterparts. Usually recurring payments include a subscription element. That is, the buyer establishes a regular sales relationship with the seller to ease processes on both ends. This sounds like an easy solution, but it entails some work.
Recurring payments are available on invoices and installments alike, which is a benefit when working with businesses abroad. When dealing with international sales, taxes and currency exchanges must be taken into consideration. The benefit of subscriptions is the buyer can be authorized for payment early in the process. Innovative technology allows transactions to be completed in each business’ local currency with their preferred payment method. However, not all markets accept recurring online payments, which means this solution has its limits.
5 most common B2B payment methods
While checks are rather antiquated for B2C transactions, they remain a common form of payment in B2B sales. Checks do have many bonuses, the first being a clear paper trail throughout payment cycle, which in some ways is why companies like them so much. However, there are downsides. Human error in composing the check will at times require a new check to be cut. Checks that bounce create a system of consequences to be handled. The amount of people involved in the process increases overhead. Finally, clearing checks takes a long time.
An ACH is essentially the electronic version of writing a check. In this transaction, the payment is pulled from the buyer’s bank account and deposited into the seller’s account. This works well with scheduled recurring payments between businesses. Authorization must be obtained from the buyer in order to establish this system, however, and not all businesses are willing to provide their bank information. That said, this is a one-time set up and going forward the payment happens with little to no effort for either party. ACH can be set up with companies who do not want scheduled payments, but regular purchases on an as-needed basis.
3. Credit Cards
Charging a card is a long-standing method of payment. This payment method tends to be a reliable way to ensure payment can be accepted, however credit cards are notorious for high fees on both sides of the transaction. Credit cards also have spending limits, which can be a problem for high-volume business sales.
4. Wire transfer
This standard payment system has been around a long time. Wire transfers involve money moved from one bank account to another through a “wire.” While safe, as far as ensuring sufficient funds are available is concerned, wire transfers require many steps to set up and execute. Wire transfers do not typically have currency limits on transaction exchanges.
5. Electronic Funds Transfers
A growing payment method, the electronic funds transfer (EFT) is an digital payment. The function is not different from an ACH or wire transfer – in fact, those two payment options are forms of an EFT. EFT is a payment solution that efficiently transfers funds at a lower cost, a faster rate than wire or ACH transactions because it is entirely digital. As automation rises, payment solution providers favor EFT. According to ystats, 59% of 2018 payments among three global regions were made electronically.