Buy now, pay later – a guide for small businesses

Buy now, pay later has been making headlines as consumers increasingly look for easy access credit in the cost of living crisis. And while you’ve probably seen this payment option yourself when shopping online, have you thought about offering it at your online shop?

Whatever you sell, from crafts and clothing to gym equipment and homeware, we’ve outlined how to set up buy now, pay later on your website. Plus, keep reading to find out the pros and cons to doing so as a small business.

What is buy now, pay later?

Buy now, pay later (also known as BNPL) is a way for online shoppers to spread the cost of a product in instalments. As the name suggests, it’s a payment method that means you don't have to pay in full right away.

Unlike a credit card, consumers don’t need to have a credit check to access interest-free credit through BNPL companies. But it can impact a consumer’s credit score if they miss any repayments.

It became popularised by companies like Klarna and Afterpay as a way to buy online and pay over a series of payments. Shoppers can usually choose an interest-free payment plan over 30 days or in three instalments. Longer-term payment plans over a period of months come with interest.

BNPL for online shops

In the same way you can list credit card, debit card, or Apple Pay as payment options on your website, you can also add BNPL platforms such as Klarna.

What’s possible and how you set this up will depend on your business website provider.

Many third-party marketplaces and commerce platforms already have buy now, pay later integrated into the payment journey. For example, if you sell on Etsy, then chances are your customers are using Klarna already without you even knowing it. It’s an option available to them at the checkout.

How does buy now, pay later work?

The different buy now, pay later apps work by charging businesses a fee for using the service and then they take charge of collecting payments from your customers. You’ll always be paid for your sales up front (minus any fees).

For consumers

• it’s an option at the payment checkout
• directed to the provider’s website or app
• agree to a repayment plan and how many instalments
• return to your site to finishing buying the item
• late repayment fees and interest may apply

For businesses

• you select and integrate a buy now, pay later service into your website
• pay fees (initial setup and for each transaction)
• you always get paid for the item up front

How to use buy now, pay later for business

Typically buy now, pay later is useful for businesses selling high priced products like technology equipment or furniture. However it’s also useful if you sell a range of products and want to encourage people to add more items to their basket, such as clothing or homeware.

Set it up for your business by following these simple steps:

1. Choose a provider (for example, PayPal, Klarna, Clearpay)
2. Create an account (you’ll need your business email address and a link to your website)
3. Integrate with your point of sale (POS) system

Always do thorough research when choosing a provider, looking at reviews and all the small print to make sure the terms are fair and the firm is trustworthy.

The Money and Pensions Service commissioned a report into the buy now, pay later market to help businesses understand more about trends and how the process works.

Pros and cons for business

As with anything, there are benefits and drawbacks to using a service like buy now, pay later. Here are some of the things to consider while making a decision for your business.

Pros

Attract more customers – offering flexible ways to pay could mean people decide to shop with you.

Encourage multiple sales – not having to pay for something straight away can mean shoppers are more likely to buy more than one item when using buy now, pay later schemes.

Diversify your customer base – nearly half of 16 to 24 year olds use buy now, pay later, according to research from student discount website, Student Beans. So it could be a way to attract younger shoppers.

Get paid up front – the BNPL company takes on the underwriting and risk when offering credit to your customers.

Cons

Higher returns – some people use buy now, pay later apps to try items or order multiple sizes, returning what they don’t need before any repayments are due. For example, Klarna advertises itself as a way for you to let your customers ‘try before they buy’.

Fees – it costs you money to offer a BNPL scheme and comes with fees (around two to eight per cent) for every transaction, just like with a credit card.

Encourages over spending – these schemes make it easy for your customers to access credit and can lead to overspending and getting into debt. This might not align to your ethical values as a business and could impact how customers see your brand.

Cash flow delays – while many BNPL companies say you’ll get paid up front, be sure to check your payment terms and consider how this could impact your cash flow. For example, Klarna typically pays out after one week and captures orders daily.

Legislation is on its way – the UK government plans to regulate buy now, pay later companies. Following the result of the consultation, this could change the way they work and how you’ve implemented the scheme.

Buy now, pay later companies

There’s a whole range of buy now, pay later companies, including:

• Klarna
• Clearpay
• Payl8r
• Laybuy

PayPal has added its own ‘pay in three’ option for people looking for interest-free credit on shopping. And banks are increasingly offering similar options, for example Monzo Flex and Instalments by Barclays.

These schemes are more common for online shops but some high street retail shops also offer BNPL.

Do you accept BNPL for your business website? Let us know your experience in the comments.

Money management guides for business owners

• How to improve your business credit score
• Cost of living support for small businesses
• Credit control – how to protect your finances
• What does product liability insurance cover?