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B2B payments: Definition, methods, and trends

B2B payments: Definition, methods, and trends

Business owners engage in business-to-business (B2B) transactions all the time — but even though we’re in the age of technology, these types of payments aren’t always digital. As the world becomes increasingly more reliant on digital means of communication and business, it’s essential to know how the B2B process works, and the new, evolving ways businesses pay each other.

What does B2B (business-to-business) mean?

Depending on the type of business, one will usually conduct at least two types of transactions in its lifetime: B2B and B2C. B2C, or business-to-consumer, refers to the transactions between customers and businesses, while B2B is solely reserved for business transactions.

There are a few different ways that business-to-business transactions work. For example, some companies sell products tailored to other businesses — such as Slack, an instant messaging service designed for other businesses’ work teams. Mega office supply giants like Staples may also work B2B with local businesses to supply paper at wholesale prices.

B2C businesses work mostly for the consumer.

So while B2B distinguishes relationships from B2C, companies that work with businesses and consumers can still conduct B2B-only payments.

How do B2B payments work?

B2B payments are a classification of transactions. Functionally speaking, they work the same way as any other transfer of funds between two parties. The key difference is that a B2B payment is between two business entities rather than a business and a consumer (or two private individuals).

Whenever your business pays a vendor or supplier for your company’s goods or services, you make a B2B payment. Check, credit, wire transfer, or cash payments can be made.

Let’s say you run a citrus orchard called Sunny Orchards. You grow and sell oranges, lemons, and limes to nearby juice manufacturer plants, like Welch’s, Tropicana, and Minute Maid.

Every time you buy fertilizer or other supplies for your citrus groves, pay the shipping company to ship your fruit to juicers, or pay your citrus inventory control software provider, you’re making a B2B payment.

Because Sunny Orchards sells directly to juice manufacturers and not consumers, your company is a B2B company. So every time your business clients (in this case, the manufacturing plants) buy your fruit, you make business-to-business payments.

But the actual type of payment will vary between sales interactions and different companies. Most businesses use several methods — but it boils down to what the company prefers based on convenience, payment costs, and habits.

What is a business’s preferred payment method?

Sunny Orchards has set up automatic recurring payments using credit cards and ACH (Automated Clearing House) transactions for its ongoing costs, such as standing supply orders, payroll, and software subscription expenses.

These digital, recurring payments save Sunny Orchard valuable time and reduce the risk of human error. And yet, paying electronically isn’t the norm in the B2B payment space.

According to The Treasurer’s Guide to AR Payment Optimization, about 40% of B2B payments made in the U.S. are check payments — which means physical checks still play a significant role in business across the U.S.

However, most businesses (even small businesses) will likely use several methods. Each method will have advantages and drawbacks for business owners, so let’s explore the various B2B payment types.

Paper checks

Paper checks are the traditional way to pay businesses. The process is simple: You write a check, give it to your supplier, and they deposit the check at their financial institution.

However, the processing time on checks can feel like a hit or a miss — the average time is two business days, but it can take up to seven.

Waiting on payments to go through complicates both businesses: Payers must wait for the vendors to deposit the check, and payees must hold off on spending the funds until the check clears.

Another downside of using checks is that you have to create them manually. This takes time, especially if your business has to write many checks. There’s also the risk of making mistakes, which can lead to accounting errors and, in turn, affect vendor relationships.

So why are checks so popular with businesses?

The main draw is security. Checks are an authenticated payment method issued by financial institutions and provide a paper trail to verify transactions, making them an official record that protects both parties in the event of fraud or disputes.

ACH payments

ACH payments are electronic funds transfers between two financial institutions in the U.S. that don’t require credit or debit cards.

Paying this way is easy: You enter your bank account details and authorize the debit from your account. Alternatively, you may also credit your recipient using their details. Think of popular online payment methods like Zelle, Venmo, or PayPal — all three rely on the ACH Network to successfully move money between two accounts.

In fact, ACH is becoming more popular in the B2B payment space. According to Nacha, ACH Network payment volume for business-to-business transactions rose by 20.4% between 2020 and 2021.

The appeal? Low or no transaction fees and ease of payment without risking security. There is a drawback, though: The payment isn’t instantaneous. It can take one to three days to process, which can be a problem with time-sensitive payments.

Credit cards

Many businesses prefer paying with a credit card because they can set up autopay — which means they can make their payments in specified amounts, on time, every month. Plus, many credit cards come with perks like cash back and airline points.

But, as with other B2B payments, credit cards have a downside: Interest charges and annual and monthly fees. This means you might incur a fee per transaction or raise interest charges if you don’t pay your balances in full monthly.

Debit cards and cash

Debit cards deduct funds from your business bank account while leaving a transaction record in your bank statement. Debit card transactions are generally fee-free, a plus for any business.

But you can’t make purchases that exceed what’s in your account, which can be a problem if you don’t like to go below a certain balance or experience fluctuations in incoming revenue.

Cash is another fee-free option. And depending on your industry, your suppliers might prefer it because it reduces payment acceptance costs. However, not every company accepts cash; paying in cash is nearly impossible to track.

3 B2B payment trends every business owner should know

The B2B payment space is always evolving. From cash to credit, businesses have plenty of options — plus, payment technology is continuously improving for safer, more convenient, and faster payments.

So, as a business owner, you want to stay on top of business-to-business payment trends. 

If you don’t know about shifting preferences or industry-leading tools that protect against fraud, increase efficiencies, and streamline processes, you’ll risk damaging your vendor relationships, overpaying on fees, and wasting time.

Trend #1: COVID-19 increased the use of digital payments

COVID-19 shook the world, including the business-to-business payments industry. According to research by Bain & Company, payment terms for large accounts in some of the hardest-hit industries increased drastically from 60 days to 90 days.

Amid COVID-19, millions were out of work, and businesses were forced to shut down. It was, therefore, nearly impossible to issue paper checks, turning things upside down for AR and AP departments.

As a result, CFOs turned to digital transactions to keep track of payments — and vendors that hadn’t already transformed had to adopt cloud-based payment transactions and financial solutions.

Trend #2: Rising fraud is pushing businesses to use safer payment methods

Security for B2B payments is crucial. But thanks to the increased digital transactions, fraud has increased significantly.

Some occurrences of fraud are happening with newer technologies. For example, according to a report by Senator Elizabeth Warren, customers of the Zelle payment services app will lose over $255 million to scammers by the end of 2022.

Businesses and financial institutions are more focused on paying safely, so you need to ensure your business offers secure payment options for digital payments — such as enabling SSL certifications, two-factor authentication, and tokenization.

Trend #3: Businesses are turning to automation to streamline payment management

The pandemic ushered in the contactless payment revolution, which saw consumers and businesses turning to digital payment methods and away from traditional methods. As a result, banks are modernizing their systems, adopting cloud-based platforms and automation to remain competitive.

As a business owner, you want to ensure you’re using the most up-to-date technology to give your vendors and business customers the streamlined payments experience they’ve expected — saving you time and money managing business payments.

Simplify business-to-business transactions with BILL

There’s no question that your B2B transactions are a huge part of running a successful business. But that doesn’t mean they should be time-consuming or difficult to track.

With industry-leading technology, you can stay at the leading edge of B2B payment innovation without being a payment systems specialist. With AP automation, BILL lets you streamline your accounts payable process and gain more control over the way you pay.

Learn more about how BILL can help your business transactions today.

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