B2B and B2C financing are two different animals, mainly because of the different motivations behind purchases. While consumers make up ~70% of GDP, this doesn't mean B2B transactions are any less valuable. In fact, Forrester says that by 2020, B2B eCommerce will be twice the size of B2C. Unless you only deal with B2B or B2C and not both, it's important to understand the differences in financing between the two groups. In this article, that's exactly what we're going to explore.
The Different Buying Behaviors Between B2B and B2C
B2C customers come into the buying process with a whole set of different expectations than B2B customers. B2C customers are used to ordering off of Amazon or walking down an aisle in a store and choosing their favorite hot sauce or a 42" TV, then paying for it and being done. Often, emotions and the need for instant gratification drive consumer purchase decisions.
Aren't B2B customers also people who have emotions as well? Yes - that is true, but emotions aren't as high with B2B transactions. Companies will plan out purchases, sometimes months in advance. This leaves little room for pure emotions or instant gratification to slip in.
There's more than emotional and motivational differences at play as well. B2C customer transactions are high volume but overall lower in total purchase amount than B2B customers. B2C customers will buy many small-ticket products that don't add up to a large purchase.
You can make the argument that a house or car is a consumer purchase that is low volume and very large. You'd certainly be right. Keep in mind that these large purchases only happen once every few years. That isn't the case for B2B transactions.
Businesses buy a small number of expensive products that amount to a large overall sale. A backhoe, 3D printing machine, and new high-end servers are all large ticket items that a business will purchase frequently.
They may even buy a large number of low-cost products, but the final ticket amount is large. Some examples are bulk printing paper, food for the office kitchen, and multiple software licenses.
Because of the high final sales price and any customizations the business might need, final sales prices are often negotiated. B2C customers don't negotiate the price of their TV or coffee at the checkout counter.
B2B sales are born through relationships and trust. Spending $500,000 on five backhoe loaders doesn't happen without any previous conversations. A business will want to make sure the backhoe will do everything needed. An employee of the business will need to test drive the backhoe around the supplier's lot. Maybe even bring it on-site for a few days. Then the final price will be negotiated. There's a bit of a dance with B2B transactions.
What's Involved With Financing A B2C Purchase?
As a consumer, you already know how easy it is to walk into a store and buy on credit. Just whip out your card and swipe. Done! Online is even easier because you can do it right from home and your credit card information is likely stored on the website. Click "complete order" and wait for your product to arrive.
For the retailer, it can't get any easier. The customer brings their own credit, chooses the products they want and in the case of self-checkout, completes the purchase, all without needing any support.
For a business, it's a completely different workflow.
Is B2B Financing More Complex?
For big-ticket items, businesses aren't going to come into a location and immediately purchase. We've already seen how there's a bit of a dance and relationship building that occurs first. At some point, it's time to pull the trigger and finance that purchase.
The purchase might be made on a business credit card. This is similar to consumers who bring their own credit. For a large purchase, this can be costly for the merchant, as credit card processing fees eat into profits. For this reason, many businesses will issue their business customers a line of credit.
A line of credit allows the merchant to invoice the business, which allows them to pay at a later date. The merchant chooses to extend any credit and payment terms, such as net 30 or net 60. These terms can also be negotiated. As well, the merchant may invoice the customer multiple times for a single large purchase, similar to a loan with regular payments.
To get a better idea of how invoicing works and what happens once payment is received, let's follow an invoice through the entire payment cycle. We start off in accounts receivable, where the invoice is created. Next, the invoice is dropped into an envelope and mailed to the customer, or it can be done digitally. The customer receives the invoice, processes it through their accounts payable and generates a check. That's the end of the line for the invoice.
The customer mails their check to the merchant. Upon receiving it, the merchant processes the check in their accounts payable. The customer's payment is recorded, and their account zeroed out. They have 100% credit available for another purchase at this point.
Contrast the above financing with a consumer credit purchase. The closest we can get is the consumer applying for new credit with a store-branded credit card. A store credit card works just like a regular credit card and is far more simpler than sending invoices.
Besides possibly using a credit card or line of credit, a business may decide to take out a commercial loan for the purchase. Getting approval for a traditional loan through a bank can be time-consuming. The bank will want to verify the business is financially solid and will be around long enough to pay off the loan. All of that takes time. In the end, the business could spend a lot of time trying to get approved for the loan only to be turned down.
B2C customers are emotionally driven but have very simple financing needs. B2B customers can require more effort to finance but because of the larger ticket, lower volume purchases than B2C customers, their value outweighs the effort involved. B2B customers have a few financing options with many of them using lines of credit, established by the merchant.
With an understanding of the differences between B2B and B2C financing, you can be clear on the options needed for both.
What's the difference between B2B and B2C finance?
- Small vs. large order
- Relationship building
- Line of credit
- Commercial Loan
- Value vs. Effort