How B2B Payment Processing Works

Businesses follow a particular process when they invoice and pay each other. This is known as the business-to-business (B2B) payment cycle. An efficient payment cycle saves the business time and money, which shows up in the bottom line. In this article, we’ll discuss what the B2B payment cycle is and methods that businesses use for handling business payments.

How do businesses pay?

Businesses need to be versatile with their payment acceptance methods. While checks might sound old school, they’re a popular payment method for many businesses. The use of checks is down substantially since 2000, but they still account for 13.4 percent of noncash business payments, according to a 2016 Federal Reserve Payments Study. One drawback of accepting checks is that they can be difficult to track.

The decrease in business checks resulted in an increase of business credit cards. The faster transaction time, better tracking, and ease of use have led the way in business credit card growth. One limiting factor is that they aren’t used as much with purchases of $1,000 or more, due to transaction cost. Also, some business owners don't like to give their employees credit cards, for security reasons.

ACH, which includes debit cards, and wire transfers, are other forms of payment that businesses use. Debit cards offer many of the advantages of credit cards, but without card network fees. The use of debit cards doubled from 2012 to 2015, although they still account for a small portion of overall B2B payments. Wire transfers also account for a relatively small number of payments. While they are very fast, in some cases same-day, they are also very expensive. Wire transfers are used in many high-value financial transactions.

B2B payment cycle

Comparing the B2B payment cycle to the B2C payment cycle is an exercise in contrast. Consumers are accustomed simply to swiping a credit card and being done with the transaction. A consumer payment is processed in less than a minute. B2B has a more involved payment cycle.

With B2B payments, there’s a workflow to go through that can take days to months to complete. There are five main steps in this workflow:

  1. The merchant approves the buyer with specific payment terms.
  2. The buyer sends a purchase order to the merchant.
  3. The merchant fulfills the buyer’s order.
  4. The merchant sends an invoice with net 30 terms.
  5. The merchant gets paid in 30 days and then sends the buyer a receipt.

Buyer payment terms are wide-ranging and largely based on the buyer’s credibility. A discount can be built into the invoice, which incentivizes buyers to pay early, shortening the payment cycle.

Options for processing B2B payments

There are several departments and potentially 3rd party companies involved in the payment cycle. Depending on where a business is in its growth, there is likely an option that will work well.

For companies that want complete control, in-house processing is best. Keeping everything in-house can be costly though, as a team must be maintained. This means making sure enough staff is on hand and that the team doesn’t collapse when a key individual leaves the company.

Outsourced and automated solutions are great for companies that want to save time, resources, and offload much or, in some cases, the entire payment process. Going this route means giving up some control, but the benefits in time and cost can be well worth it.

Below are three options for processing B2B payments.

  • Accounts Receivable Team Using the company’s in-house AR team is a do-it-yourself approach to processing invoices and payments. The AR team underwrites buyers and sends invoices for purchased merchandise. The team will also manually follow-up to collect payment.
  • Accounts Receivable Factoring/Financing Merchants that want to turn around invoices faster than what can be achieved by an in-house AR team can outsource AR to a purchase order financing or accounts receivable factoring/financing company. Using a factor to collect payments has the advantage of replenishing working capital without the traditional B2B payment cycle delay.
  • Automated B2B Payment Cycle A fast, hands-off approach to AR is the use of an automated service. Resolve provides automated AR. This means you receive cash upfront for your invoices. Resolve also takes care of billing and collections.

Simplifying B2B payments with software

Automating the B2B payment cycle means using software to handle tasks that humans usually perform. Because the software will follow the same process every time, the result has several advantages over manual processing:

  1. Cleaner integrations, which means less manual conciliation.
  2. Save time via automatic follow-ups.
  3. No more paper/fax credit applications.
  4. The software will never call in sick or quit.
  5. The software does exactly as told, greatly reducing the chance for mistakes.

Every business that processes payments from other businesses follows the B2B payment cycle. Businesses can use different methods for processing payments. Those that automate their payment cycle achieve greater efficiencies of operations. Additionally, their customers experience quicker processing and fewer hassles because of reduced mistakes, giving those businesses a competitive advantage.

Net terms & credit management

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