What Is Buy Now Pay Later?

As the world of business moves increasingly towards e-commerce, customer preferences are changing significantly. For example, a range of different payment methods are becoming more and more popular, and consumers have come to expect these, especially when they are shopping online. One such method is known as buy now pay later (BNPL), offering a short-term financing solution for your customers.

But what is buy now pay later, exactly?

Put simply, BNPL allows customers to make purchases without paying the full price upfront. This arrangement is made possible by third parties such as Klarna and Affirm, as well as other companies such as PayPal and even some card issuers. Keep reading to find out about buy now pay later methods and how these can affect your business.

What does BNPL mean for customers and businesses?

Buy now pay later methods are an easy way for your customers to purchase goods when they don’t have the funds immediately available. For this reason, they are a form of credit – the third-party company that authorises the payment is actually offering a short-term loan. However, unlike traditional loans, buy now pay later is paid without any interest.

When the customer makes the purchase, they enter an agreement with the BNPL provider who will set out the terms of the repayment. This will be either through a series of interest-free instalments, or within an interest-free period. If the customer fails to make the payment according to the pre-agreed terms, then they will incur extra charges. In addition, the customer may be required to make an initial down payment for a percentage of the overall price.

As a business owner, it’s important to remember that buy now pay later providers will take a cut of the transaction in exchange for offering your customers this financing option. Given that buy now pay later is interest free for the customer, the providers make money by taking part of your profits. It’s important to weigh up whether the increased sales make up for this reduction in your profits.

Advantages of buy now pay later

For customers, there are numerous advantages of buy now pay later. Firstly, they can conveniently make purchases and reduce the immediate financial impact of these. If they plan their budget carefully and ensure that they make all the payments on time, then they can spread the cost of their purchases at no additional cost. What’s more, the credit record requirements are not as stringent as those for traditional loans or credit cards.

As a business owner, offering your customers a variety of different payment methods is always a good idea. The more payment options that are available, the more likely that a customer will make a purchase. By offering BNPL, you may attract customers that would not otherwise buy your products or services.

Does buy now pay later affect credit score?

As previously mentioned, your credit score may affect customers’ eligibility for buy now pay later. In addition, how you use it will affect your credit score. For customers that use the system carefully and make repayments on time, there will be no negative effect and there may in fact be improvements.

However, if a customer fails to make the repayments on time, then there will be an impact on credit score. This means that applying for loans, credit cards or mortgages may be more problematic in the future.

Also, if customers apply for many different buy now pay later deals, there may be a negative effect on credit score. If a company does a hard search of your credit report then these applications will come up, which may worry lenders.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. You can easily set up instalment payments with customers directly through the GoCardless dashboard, offering a flexible payment solution that won't incur additional third-party fees.

Find out more about how GoCardless can help you with ad hoc or recurring payments.