How to Offer Financing to My Customers in Canada
The concept of offering financing to customers is centuries old and can be traced far back to ancient civilisations. The industrial revolution brought more standardized terms and conditions to the process, and nowadays it is industry-standard in the B2B space. Customers want the option to finance their purchase for a variety of reasons. By delaying payments, buyers can improve their cash flow, thus increasing working capital and liquidity. If you are a wholesaler or commercial vendor, you may struggle to remain competitive if you require immediate payment and do not offer any financing options to your customers.
However, offering credit to buyers comes with risk, and may feel daunting to many business owners. Accurately determining the creditworthiness of customers can be challenging, and poor assessments can result in customer defaults, negatively affecting profits. Fortunately, there are a variety of ways to offer financing to customers, some of which allow the vendor to outsource the risk to a third party. Keep reading to learn about how you can offer financing to B2B customers as a Canadian business.
Customer Financing Options for B2B Businesses
Net Terms: Commonly called net terms, and sometimes referred to as trade credit, this arrangement allows customers to purchase goods or services and pay for them at a later date. Net terms specify the payment period within which the full invoice amount is due. For example, "Net 30" means the invoice must be paid within 30 days. Common terms include "Net 30," "Net 45," and "Net 60." Some terms may also include early payment discounts, such as "2/10 Net 30," which means a 2% discount is available if paid within 10 days, otherwise the full amount is due in 30 days.
When offering net terms, the seller absorbs all credit risk, which may not be a viable option for all businesses. By allowing customers to receive goods and services without paying immediately, there is a chance that they could default, leading to bad debt. Additionally, sellers must be capable of assessing creditworthiness, which requires a specialized skill set. This is followed by the administrative burden of managing accounts receivable, tracking payments, following up on overdue invoices, and possible collections efforts.
While net terms provide a benefit to the buyer, the seller absorbs the negative impact on their own cash flow, which could impact day to day operations. In summary, offering net terms can enhance customer loyalty and increase sales, but it’s best suited to those companies that have adequate resources available to manage the complex process, and are not negatively affected by the delay in payment.
Invoice Factoring: this process allows companies to sell their accounts receivables to a third party (factor) at a discount in exchange for immediate cash. In turn, sellers can offer financing to their buyers, increasing customer satisfaction while mitigating the negative impact on their own cash flow by transferring the credit risk to the factoring company.
In factoring agreements, businesses receive an immediate cash advance, which is usually around 70-90% of the invoice value. The remaining amount, minus the factoring fee, is paid once the customer pays the invoice. Ownership of the invoice is transferred to the factoring company, who is then responsible for collecting the invoice. This is suitable for companies that are comfortable with customers knowing that a third party is handling their invoices.
Invoice Financing: this arrangement allows businesses to offer their customers net terms, while using the unpaid invoices as collateral to get a cash advance from a lender. In this scenario, the business retains ownership of its invoices and remains responsible for collecting payments from its customers.
Sellers receive a loan or cash advance, usually around 80-95% of the invoice value, which is repaid once the customer pays the invoice. Costs include interest on the loan and any service fees charged by the lender. Invoice financing is suitable for businesses that want to maintain control over their customer relationships and are capable of handling their own accounts receivable.
Leasing: for Canadian businesses that sell capital equipment, leasing is another method of offering financing to customers. In this arrangement, B2B companies offer equipment leasing as a form of financing to their customers by providing the equipment for use over a specified period in exchange for regular lease payments. This arrangement allows customers to access the equipment they need without having to make a large upfront investment.
There are a few different types of equipment leasing:
Operating Lease: Typically short-term, with the lessor retaining ownership and responsibility for maintenance. Often used for equipment that may become obsolete quickly.
Finance Lease (Capital Lease): Longer-term leases where the lessee may eventually own the equipment. The lessee is responsible for maintenance and other operational costs.
Equipment Financing: Providing loans or leases specifically for purchasing equipment, which serves as collateral.
While offering equipment leases offers advantages such as steady income stream and customer retention, it also comes with credit risk and administrative burden. There is always a chance that the lessee may default on payments, leading to potential financial losses. If this happens, non-payment may require costly and time-consuming collection efforts or legal action.
Managing leasing agreements, maintenance schedules, and collections can be complex and resource-intensive. Additionally, leasing agreements must comply with various legal and regulatory requirements, which can vary by jurisdiction and add complexity. Disputes over lease terms, maintenance responsibilities, or end-of-lease conditions can also lead to costly legal challenges.
Buy Now, Pay Later (BNPL): this model gained popularity in the consumer space in recent years, with companies such as Afterpay, Klarna and Affirm gaining popularity around the world and making BNPL a staple of online shopping. This arrangement allows consumers to purchase goods or services immediately and defer payment to a later date, often without interest for a specified period. Buy Now, Pay Later is now available in the Canadian B2B market, and is an attractive alternative to traditional financing options.
BNPL for B2B offers the same benefit to buyers as invoice factoring, financing, and equipment leasing. It is beneficial for sellers because it outsources the risk to a third party. Sellers can choose to bear the interest paid to the BNPL provider, or to pass it onto their buyers. This is a distinguishing factor when comparing B2B BNPL to B2C, where sellers often cover the fees.
Introducing: Tabit Buy Now, Pay Later for B2B
Tabit is Canada’s first B2B Buy Now, Pay Later solution powered by Merchant Growth, an alternative lender serving thousands of small businesses in Canada for over a decade. Tabit was founded in 2021 with the purpose of bringing the consumer buying experience to B2B, and now works with 70+ businesses in Canada.
Tabit is an omni-channel solution with two offerings: Tabit for eCommerce, and Tabit for Invoices. The eCommerce solution is designed for online businesses, and integrates Tabit seamlessly into the checkout process. Customers have the option to select Tabit at checkout, and are taken into an application that takes only a few minutes to complete. They are pre-qualified on the spot, and presented with loan term options to select from which contain the interest rate and payment schedule.
Tabit for Invoices was designed for businesses without an online checkout. In this process, the seller shares a unique link with their buyer, where they can apply for Tabit financing. Upon approval, the buyer uploads their invoice to the online portal and the seller is paid. In both scenarios, buyers can check their credit limit before they start shopping using Tabit’s pre-qualification feature. Sellers are always paid in one business day.
Benefits for the buyers
- As low as 0% interest
- Automated one-time application
- No collateral required as security
Benefits for the sellers
- One-time integration for eCommerce sellers. Tabit is integrated with many commerce platforms. Simply add it and forget it. Open APIs are available for in-house builds.
- No tech integration required for invoice solution. Simply access your portal and issue links.
- Improved cash flow: get paid the next business day for any sales purchased through Tabit
- Grow your sales: increase order value and frequency of purchases
- Eliminate risk: Tabit takes full responsibility for fraud and credit risk
Get started with Tabit today
Learn how Tabit can support your business by booking a demo today.