A Guide to Choosing the Right B2B Payment Methods for Your Business
Sep 22, 2022
Over the last decade, business-to-business payment methods have flourished. What exactly are we talking about here? Simply about how a transaction is going to be processed and money exchanged between businesses.
Many different payment methods exist. They range from electronic options like credit cards, wire transfers, and Electronic Funds Transfers (EFTs) - to paper forms such as cash or paper checks. It’s all about making the right choice for your B2B payments.
B2B payments are notoriously more complex than B2C payments. Typically, businesses deal with a higher volume of transactions, and processing times are longer due to checks and balances. Comparatively, B2C payment transactions are usually settled on the spot.
The good news is, B2B payment technology has known changes in recent years, shortening processing times and making it less of a hassle for business owners. Still, the gap with B2C payment remains. If some businesses have made the switch to digital banking platforms, a staggering 81% of payments are made via paper methods in the US (McKinsey). It’s a shame when we know that automation and digital payment methods are a driving force in helping B2B businesses get paid on time.
When selecting your payment methods, remember that it’s not only about getting the money into your bank account: your payment options will have an impact on your electronic invoicing, tracking, accounting, and more. Your selected payment method will affect your business’s long-term growth and scalability. Remember to keep in mind your current needs but also forecast your future needs.
With all this in mind, we know it’s not easy to figure out which payment method is best for your business. In this article we answer the following questions:
-What are your options with B2B payment methods?
-What payment method should you choose for your business?
Let’s get into it!
Upflow is an AR cash collection software that supports a range of B2B payment methods. Our solution helps B2B businesses get paid faster and on time. Interested? Give it a go!
Cash: the grandfather of all payment methods
It’s safe to say that cold hard cash has been around for a very long time. Generally speaking, it’s a payment method that is recognized by most.
Why use cash for your business?
What are the benefits of cash payments? For starters, there are no transaction fees, and this can keep the cost of transactions low. Paying cash can be a quick way to process a payment. After all, once it exchanges hands it’s yours to keep.
What are the disadvantages of cash?
The downside of this method is that cash payments can create a negative cash flow. Once the cash is exchanged it is immediately deducted from your balance.
We don’t recommend this payment method as it can be time-consuming to manually record transactions in your accounts. It's not easy to track and can pose a security issue as it lacks traceability. Not to mention, you’ll have to go to a bank and deposit it.
Checks: still thriving despite long processing times
Paper checks don’t need much of an introduction. They’ve been around for a while and remain a common B2B payment method. In fact, about 40% of B2B payments are still made by sending paper checks by postal service in the US, according to pymnts.com.
But its usage has been in decline in the last decade. Its slow processing time has made it difficult to compete with newer online payment methods.
Checks still remain a top payment method mainly because large companies - especially older ones - are just simply used to using them. Old habits die hard!
Why use checks as a payment method?
Some businesses like having a paper trail. Using checks will definitely tick that box. Another upside is that they do not need to be deposited immediately.
What are the disadvantages of checks?
On the flip side, these advantages can also turn into disadvantages. Dealing with paper methods can be time-consuming and difficult to track. Your accounting team will need to manually record and reconcile invoices in their workflow. This definitely isn’t the best use of their time.
This also means that paper checks slow down the time between your actually receiving the money in your bank account, impacting directly your business’s cash flow.
Not to mention, that paper checks can also increase the risks of your business being exposed to payment fraud.
What’s our recommendation?
Checks can be a good payment method if you’re a small B2B business that isn’t processing a large number of transactions. We suggest that you consider switching to online payment methods to optimize this process to make sure you get paid faster.
Keep in mind that it also depends on your clients: if you have enterprise-size accounts that offer consequent business and only use checks, you might just have to adapt!
ACH payments: practical but US-based
ACH stands for Automated Clearing House. ACH is an electronic payment method that has become fairly common in the B2B digital payment ecosystem. It’s fast and is more efficient than paper methods.
How does it work? It’s simple, the electronic transaction moves cash from one entity to another via bank accounts and a routing number.
B2B businesses have a preference for this digital method because it’s cost-effective and usually has little to no associated fees.
Why use ACH payments?
Automated Clearing House payments allow you to easily manage your cash flow and settle your accounts. They are traceable and will appear on your business accounts statement at the end of each month.
Another added benefit is that ACH transfers can integrate into your business's ERP system. This will save your finance team's time and make record keeping much easier.
What are the disadvantages of ACH payments?
The drawback to this digital method is that it can only be used in the United States and not for international payments. There is also a daily deadline to make these types of payments. If you miss the cut-off time you’ll be forced to wait until the following day before making the transaction.
What’s our recommendation?
We recommend ACH payments to businesses in the US that rely on a subscription-based model or have recurring payments.
Credit cards: a good way to get extra credit
Credit cards are a popular form of payment for B2B business transactions. Many companies have business credit cards or virtual cards such as Visas or Mastercards that can be added to your digital wallet. It’s a convenient payment method that can also offer you a credit line, giving you access to extra funds.
What are the advantages of Credit cards?
Using a credit card or debit card is a good digital payment method thanks to its traceability. Transaction records are easily accessed via electronic statements. This makes record keeping a lot easier for bookkeeping.
This B2B payment method is also a good way to avoid exposing your business to cybercrime. Financial institutions nowadays offer one-time use digital cards or even ghost cards to reduce your risk of fraud.
What are the disadvantages of credit cards?
Using a credit card as a payment method can be very costly to your business. Credit card providers can charge up to 3% to 4% percent in processing fees. Making them an expensive option compared to other methods.
Accepting credit cards as a form of payment can also lengthen your cash collection cycle as they often require management approval before they can be used.
What’s our recommendation?
If you are a small business with a lower number of transactions then this could be a good payment option for you.
However, we don’t recommend this as your primary payment method due to the processing fees mentioned above. This is even more true if you are a subscription-based business.
Wire transfers: fast but not 100% user-friendly
Similar to ACH payments, wire transfers are an electronic payment method often used for B2B transactions. Companies use this method to make real-time transactions.
Two types of wire bank transfers exist. In a cash wire transfer, the funds are directly sent to a bank where the recipient can pick up the payment. In a digital wire transfer, the funds are digitally sent directly to the recipient's bank account.
Why select wire transfers for your business?
This digital payment method has one of the fastest processing times. This is ideal for B2B businesses.
What are the disadvantages of wire transfers?
From your customer’s point of view, this option is a little inconvenient.
With this method, customers first have to log in to their bank and manually input your business's bank details to complete the transaction.
In this scenario, the risk of human error can delay the reception of your payment. Also, it’s not very customer friendly, which can increase the time your customers take to pay you.
What’s our recommendation?
This payment option is recommended for companies that operate on a global scale. Wire transfers are almost instant and the cash becomes available once the funds have been deposited in the account.
Digital payment platforms and gateways: our personal favorite
Online payment gateways offered by fintech companies have grown in popularity in recent years. These technologies have disrupted the payments market and made online payment systems more popular. Some brands you might be familiar with are:
How do they work? The digital platforms act as a payment processor. They electronically transfer funds from one account to another without using a bank account. These gateways act as a ‘middle man’ so to speak but are still connected to bank accounts.
They have become a staple in the B2B payment landscape as they streamline the payment cycle.
Why use payment platforms and gateways?
Payment gateways easily connect to your finance stack making invoice tracking in your accounting software a lot easier!
They are a win-win for both your business and your merchants as they optimize the B2B payment process on both sides. They work similarly to a direct deposit. On top of that, they often have an analytical functionality to help you gain visibility on your payment cycle.
What are the disadvantages of payment platforms and gateways?
The drawback to this option is that these platforms can request high usage fees. A lot higher than other forms of electronic payments. However, remember that you should always take into consideration your future needs. It might be more expensive today but it will probably save you time - and money - in the long run.
What’s our reccomendation?
We highly encourage business owners to use this method as they can automate their accounts payables and accounts receivables process.
This option is especially interesting for SaaS B2B companies that have a subscription-based billing model.
Selecting the right B2B Payment solution mix
Every business is different and will require different payment methods. It’s all about finding the right balance in your payment mix to match your business payment terms and your customer's preferences.
Remember that most customers do want to pay you. They just don't know how. According to a 2020 McKinsey study, 78% of US consumers used at least one type of digital payment method, and 58% used two. So your job is to offer a mix of payment methods to make it easy to pay you!
The easier it is to pay you, the quicker your customers will actually pay you. That’s why we offer several payment options on our AR solution payment portal, decreasing late payments as well as DSO.
Several factors must be considered when selecting your B2B payment method: the volume and frequency of your transactions, your business's pricing model, and if you are an international or cross-border business.
Keep in mind that you must fulfill your current payment method needs but also think about your future ones. This ensures that your payment stack is scalable as your startup business grows.
Several payment methods are available to you. It is your choice to select the ones that are right for your business model. Each option comes with its own advantages and disadvantages.
Adopting a digital payment platform streamlines your accounts receivables process. Thanks to the gateway your payments can automatically be synchronized with your finance stack.