B2B Payments 101: What Is It and How Does It Work?

Business-to-business (B2B) payments are on the cusp of a whole new era.

Interestingly, B2B payments are said to have a larger transaction volume than the B2C payments market. They are also a lot more complex. 

If you look at the numbers, the B2B payments market is worth nearly $240 trillion, which is twice as large as the B2C market.

Having said that, innovation in this space has been considerably slow.

The B2B payments space has been plagued by manual processes and inefficient payment methods for decades. However, advanced technology and innovative digital processes are turning things around. The cloud, big data, and APIs — all have a stake in significantly altering the future of B2B payments. New technologies are baking greater agility into B2B payment processes. 

In this article, we will take a look at the different types of B2B payments.

Here’s what we’re covering:

TL;DR:

• B2B payment processes involve payments made between businesses in exchange for goods delivered or services offered. In most cases, B2B payments have longer payment cycles and involve a range of payment methods.
• Explore the different types of B2B payment methods — checks, ACH payments, credit cards, wire transfers, digital payment platforms, and payment gateways. 
• B2B payment workflows are initiated when an invoice is raised. This process then involves invoice review and approval, payment processing and settlement, and reconciliations.
• There are a few challenges to overcome in B2B payment workflows, such as interoperability between businesses, payment delays, lack of payment transparency, security breaches, payment charges, and penalties. These challenges can be tackled with automated and secure B2B payment software.
• B2B payment software ensures a smooth flow of payments by speeding up payment processing time with automated workflows. It also cuts down on payment processing charges, enhances bookkeeping, and ensures risk-free and secure transactions.
• We also cover key things to keep in mind when choosing a B2B payment software.

What are B2B payments?

Business-to-business (B2B) payments involve the transfer of value between businesses for the exchange of any goods or services. B2B payments are also a lot more complex than B2C payments, and they require more time to approve and settle the payment. They can be one-time payments or recurring payments based on the nature of the business carried out or the contractual agreement between the entities.

According to a report by Payments Cards & Mobile, the global B2B payments market is expected to reach $31.71 billion by 2031. The pandemic took a toll on the payments market, redefining the way businesses transfer funds (along with a host of other things). Owing to the worldwide lockdowns, the global pandemic resulted in a drop of 11% in overall payment volumes. In fact, prior to the pandemic, only 33% of B2B payments were made online, compared to B2C’s 70%.

What are the different types of B2B payments?

B2B payments can be carried out through traditional means — such as cash, checks, bank transfers, and credit cards. With the proliferation of digital payment options, B2B payments can also be made via channels such as electronic funds transfers or online B2B payment platforms.

The oldest form of payment is cash. While it is a great method for immediate settlements, the usage is dropping in the economy with the influx of modern payment mechanisms. The use of cash between businesses remained at a strikingly high rate up until the pandemic. According to ‘The Visa Back to Business Study’, nearly 33% of small businesses have accepted lesser payments in cash or have stopped accepting payments in cash since the pandemic. 

It’s important to understand that the effectiveness of your payment processes is what matters most. Considering how the payments industry has evolved tremendously in the last few years — digital payment mechanisms are increasing the operational efficiencies of B2B payment transactions across the globe. For 54% of companies worldwide, ‘speed of payment’ is a critical factor that influences their choice of payment methods for cross-border transfers.

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Let’s take a look at the more popular types of B2B payments:

Checks

Paper checks may seem outdated, but they continue to be used in business transactions, especially in cases where more security and data exchange are required. Paper checks reportedly make up close to 40% of all business-to-business transactions. Businesses are also more inclined to use checks as they can better track cash flow and inventory with the definitive audit trail that checks provide.

ACH Payments 

ACH, which stands for Automated Clearing House, is another form of B2B payment that moves funds electronically from one entity to another. These types of payments are cost-effective and are ideal for B2B recurring payments. The drawback of this method is that payments are sent in batches during specific windows of the day, resulting in a longer time frame for processing payments. As per a report by Deloitte, B2B payments are shifting from ACH payments and checks to real-time payment rails.

‍Credit cards

Credit cards have always remained a primary method of B2B payments. While credit cards offer the convenience of instant transactions, they are used for small to medium payments. It is not always the most preferred option for large-volume transactions, owing to the credit limits imposed by issuing businesses and the fact that credit card transactions include a processing fee that ranges between 1.5% and 3.5%. Businesses are also now opting for virtual credit cards, which are tied to the regular credit card number of a business account. This means that all transactions appear on a single statement at the end of the billing cycle.

Wire transfers

Wire transfers can either be made via cash or digital mode. Cash-based wire transfers are where payments are sent to a cash office for a recipient to collect. In a digital wire transfer, funds are electronically sent from one business bank account to another. One of the biggest advantages of wire transfers is that they are done through banks, resulting in payments being processed the same day. 

Digital payment platforms and payment gateways

Digital payment platforms like Venmo and PayPal are used to electronically transfer payments from one business account to another. Besides facilitating payments, these payment platforms also offer services like peer-to-peer transfers, digital wallets, and, in some cases, even financial management tools. B2B payment gateways like Stripe and Square facilitate the secure transfer of payment information between a business and the payment processor or bank. These payment gateways are primarily used for processing payments for e-commerce transactions and ensuring that sensitive payment details, like account details, are encrypted and securely transmitted during these transactions.

How do B2B payments work?

B2B payments generally work when the buyer pays the supplier. It is the transfer of value that is denominated in currency for the exchange of goods or services offered.

The processing and settlement time of B2B payments could range anywhere between a few days — sometimes weeks or months — making them more time-consuming when compared to B2C transactions, which are typically settled on the spot.

Here’s how B2B payment processing works:

• B2B payment processes occur once the order for the products or services has been fulfilled and an invoice has been raised by the suppliers for the buyer.
• On receiving the invoice, the buyer reviews it and then approves it for payment.
• The buyer will then have a stipulated time to make the payment. Most small to medium-sized businesses may seek supply chain financing or unsecured business loans to make the payment within the given time and as per the payment terms specified in the invoice.
• The buyer can then make the payment via any of the payment methods seen earlier; this could be via a check, bank transfer, ACH, or any of the preferred digital payment modes.
• The next step is processing the payment, which involves intermediaries like banks and payment processors. 
• The payment is then settled after a few days or months, based on the method of payment.
• Both the buyer and seller will then have to reconcile the payment and update their accounting records to reflect the transaction.

We’ll understand this better with an example.

Let’s say an automotive OEM supplies 5,000 engines to a car manufacturer. Once the engines are delivered to the car manufacturer, the OEM raises an invoice for $500,000. The car manufacturer reviews and approves the invoice. They then make arrangements to make the payment to the OEM via bank transfer, which is processed and settled within 30 days. 

Once the payment is settled, the OEM records the payment in their accounts receivable, and the car manufacturer marks the invoice as paid under their accounts payable.

B2B payments: Challenges and opportunities

B2B payments have a few challenges that need to be identified and resolved, such as interoperability between businesses, payment delays, difficulties in tallying and reconciling payments, risks of undetected fraud, and payment charges for large-scale transactions.

We’ll run through these challenges in detail:

• Interoperability between businesses: In most cases, buyers and suppliers are of different natures. This could introduce hurdles in the flow of B2B payment transactions.‍
• Payment delays: B2B payment settlements can stretch up to 45 days, at times even up to 100 days. 

• Lack of payment transparency: Businesses require visibility into the transaction flow to reconcile and account for B2B payments. Any lack of visibility may result in errors, not to mention a drain on time and resources. ‍
• Security breaches: High-value B2B payments are prone to security threats, making it imperative to ensure cybersecurity measures are in place and sensitive information remains secure at all times.‍
• Payment charges and penalties: Large-scale payments involve high payment charges. Moreover, additional amounts are levied as a penalty for making late payments.

Automation is the key to overcoming these challenges. Advanced billing tools like Zenskar are coming to the forefront, introducing a new level of flexibility when it comes to managing the revenue side of operations for businesses and their finance teams.

Key benefits of B2B payment software

A B2B payment software ensures that payments are processed automatically, equipping businesses with a multitude of benefits, like — faster payment processing time, better cash flow, enhanced bookkeeping, reduced payment costs, and secure payment workflows.

• Speeds up payment processing time: By employing automated payment workflows, B2B payment software reduces the time taken to process and settle payments.‍
• Ensures better cash flow: Automated payment reminders and dunning systems ensure buyers pay up on time, reducing payment cycles significantly and optimizing cash flow for suppliers.‍
• Enhances bookkeeping: The B2B payment software reconciles payments in real-time and automatically updates the book of accounts, ensuring up-to-date financial records.‍
• Cuts down payment processing charges: B2B payment software has streamlined payment processes in place, ensuring timely payments and subsequently reducing the costs associated with payment delays or errors occurring due to manual handling of transactions.‍
• Secures payment workflows: In addition to ensuring compliance with regulatory requirements, B2B payment software also has stringent security and fraud detection measures in place to ensure risk-free and secure transactions.

Things to consider when implementing a B2B payment solution 

When you’re on the lookout for the right tool to automate B2B payment workflows, it’s important to take into consideration the tool’s capabilities when it comes to invoice generation, payment collections, reconciliations, and reporting. 

• Invoice generation: Ensure the tool that you opt for is able to capture information from contractual agreements, translate that into invoices, and generate invoices as per the agreed billing or subscription cycles.‍
• Payment collections: Opt for a tool that has efficient dunning systems in place with the ability to automate and personalize payment reminders.‍
• Reconciliations: The tool that you choose should be able to recognize revenue and payments made and automatically create journal entries.‍
• Analytics and reporting: Additionally, the tool should be able to pull up critical data on revenue earned, usage metrics or churn rate for SaaS businesses, and other metrics to inform decision-making.

Breeze through B2B payment workflows with Zenskar

From generating timely invoices to ensuring payment follow-ups and reconciliation — Zenskar is designed to help you automate the B2B payment process.

Built to help finance teams experience the power of automation, Zenskar puts an end to manual B2B payment practices. The tool’s advanced functionalities are designed to minimize grunt work, ensure error-free billing processes, lower costs, increase the speed of payment collections, and ensure an overall smooth B2B payment workflow.

‍Book a demo today to explore how you can future-proof your B2B payment workflow!

Frequently Asked Questions (FAQs)

1. What is the best payment method for B2B?

The best payment methods for B2B transactions are checks, ACH payments, and wire transfers. Their secure, low-cost, and reliable nature makes them best suited for large-scale and recurring B2B transactions.

2. What is the difference between B2B and B2C payment?

The primary difference between B2B payments and B2C payments is that B2B payments are transactions between businesses, whereas B2C payments are carried out between a business and an individual consumer as per a determined rate for the value delivered via a product or a service. B2B and B2C payments also differ in terms of complexity and payment volumes.

3. What is a B2B payment?

Business-to-business payments, or B2B payments, are the transfer of funds between businesses, typically a buyer and a supplier, for goods or services provided. B2B payments are high-volume transactions that require detailed invoicing and complex payment workflows.

4. What is the difference between P2P and B2B payments?

Person-to-person payments, or P2P, are digital transactions between two individuals and are comparatively easier to execute, whereas B2B payments are transactions between businesses for the exchange of goods or services. B2B payments are more complex and involve a lot more processing steps.