During the 2020s, almost all businesses will have been looking at b2b payments processing solutions to meet changing consumer needs. Online and contactless adoption multiplied, and digital payments rose. Between 2019 and 2020, the number of U.S. consumers using two or more types of digital payment methods increased by 8%.
Consumers are increasingly gravitating towards quick and convenient payment methods such as contactless payments and mobile wallets when transacting with businesses. But what about in the business-to-business (B2B) sector?
Industry data shows that the B2B payments landscape is rather diverse. While wire transfers and checks are quite common, the corporate credit card market is projected to have a compound annual growth rate (CAGR) of 7.3% by 2026, so we’ll likely see more credit card use in the business sector.
All this to say that if your company transacts with other businesses, it’s worth supporting multiple B2B payment methods so you can cover your bases.
Not sure where to start? This post offers a primer on B2B payments to help you understand which methods and solutions work best for you and how to implement them.
TLDR
- B2B payments are payment transactions that occur between two businesses.
- While traditional B2B payment methods like wire transfers and checks remain common, the corporate credit card market is projected to grow at a CAGR of 7.3% by 2026. It’s crucial for businesses to support multiple B2B payment methods to adapt to diverse payment preferences.
- Choosing a B2B payment system crucial to addressing common challenges that B2B payment systems face as well as improving client experience.
What are B2B Payments?
Business to business or B2B, is a term that specifies with whom business is conducted. Business to business organizations provide services or goods to other companies, unlike business to consumer (B2C), which is when businesses transact with consumers (individuals).
Business to business payments, therefore, refer to the payment processes and activities between two businesses. In most cases, the way two businesses transact between themselves differs from how consumers transact with businesses.
Consider a company that provides office space to another business. This is a B2B merchant, and the kind of payment terms between these two companies would usually be monthly or annual. Transactions for such a deal are pretty straightforward. An invoice would be sent, and it would need to be paid within an agreed timeframe.
A business that provides IT support solutions to other companies is also considered B2B. But the nature of such services could mean that monthly invoices are always different and plan terms are regularly changed. This business would have more intricate invoicing needs than the office space provider.
Generally, but not always, B2B transactions tend to occur less frequently but at far higher amounts, involving extended sales cycles, negotiations, contracts, and on-going relationships between the two businesses.
B2B vs. B2C Payments
Despite the fundamental similarity that money is being given from one entity to another, B2B and B2C payments are quite different.
B2B businesses tend to have longer payment terms with their clients and relationships usually focus on long-term, recurring business. The amount per transaction is often quite significant and as a result, there’s typically quite a bit of negotiation that goes into determining payment amounts, terms, and cycles. These longer payment cycles have historically lent themself to slow payment processes, like checks, that are no longer common for B2C transactions Due to the complexity of most B2B transactions, there’s often more documentation required for the payment, such as contracts.
Business to consumer (B2C), by comparison, relies on speedy payment processing to transact on the spot. Most B2C transactions are performed at the point of sale (POS), whether it’s eCommerce or in-store checkout, which lends them to faster payment methods like mobile payments more often than B2B transactions. In the United States, at least, there is generally no negotiation involved so the price of a given item or service is predictable. B2B payments are mostly made through invoicing and then longer payment cycles.
It’s worth noting that the lines between B2C and B2B have been blurring for a number of years. (Marketers have begun using the term B2P (business-to-person). This blurring is affecting payments as much as any other area. Things that have begun to merge:
- As mentioned, while payment methods tended to be more distinct 15 years ago, with consumers favoring credit and debit cards and businesses favoring checks and transfers, that is increasingly changing. Businesses are moving more and more to the methods consumers prefer.
- B2B resisted the eCommerce era more so than B2C payments, but online payments have largely become the standard for B2B businesses these days.
- B2C has been fully embracing the as-a-service concept that was largely reserved for B2B products. Recurring billing has become an important feature for B2C payment providers.
Challenges of B2B Payments
Like most things in life, taking B2B payments does feature some challenges.
- B2B transactions can be more complex than consumer transactions, involving negotiated terms, contracts, and often larger sums of money.
- Longer payment cycles are common in B2B transactions, leading to cash flow issues for suppliers.
- Many B2B payments still rely on manual processes, leading to inefficiencies and human error.
- B2B payments are vulnerable to fraud, particularly when involving large sums of money and manual processes like checks.
- Cross-border B2B payments can be complicated due to currency conversions, regulatory compliance, and varying banking systems.
Most of these challenges can be addressed by choosing the right payment provider.
What are the Most Common B2B Payment Methods?
Business-to-business payment terms can differ quite a bit depending on the business issuing the invoice. Unlike B2C, where most transactions are simply taken at the point of sale using a credit card, debit card, or mobile payments from digital wallets, the types of payments for B2B companies can differ. These are the most common:
1. ACH payments
ACH payments, sometimes known as EFTs (electronic funds transfers) or echecks, are made through an Automated Clearing House that acts as an intermediary between bank accounts to complete bank transfers. It’s popular with B2B businesses as it’s a contractual payment method, requiring both parties to complete paperwork. Thus, it’s more secure.
It’s also cost-effective. ACH payments take up to three days to process and cost around 1% of the transaction with a $10 cap.
ACH payments are suited to businesses making recurring payments. One-time transactions are more likely to be completed through one of the other methods below.
2. Credit cards/B2B credit cards
Credit cards are the staple of payments, but not every B2B business accepts them. Just about every business and consumer will prefer to pay with a credit card, but for the business accepting the payment, there are going to be transaction fees involved. If you’re making a payment with a B2B provider, you will need to check if they accept credit card payments.
For businesses looking at paying with a credit card, there are often reward schemes and low-interest rates designed to attract businesses with special B2B credit card solutions offered by Visa, Mastercard, and most other card issuers.
On the merchant side, B2B cards come with lower processing rates if you qualify for level 2 and level 3 card processing. These levels require you to provide more transactional data and when implemented properly, you can lower your credit card processing costs significantly. (Read the section B2B processing costs below to learn more.)
3. Paper checks
Checks still have a place in the U.S. B2B sector, but they are by far the least efficient means through which to pay and be paid. In most cases, checks are mailed, taking days to reach the receiver, and then the onus is on the receiver to take the check and cash it.
For the business making the payment, checks may help to buy time to ensure money is available in the accounts, but it is a burdensome process for the receiver.
What’s more, if the funds are not available at the time when the receiver tries to cash the check, it will bounce, and bank fees will need to be paid. They could also incur a late fee from the business owed if the money is unavailable.
The paper nature of checks makes it harder to cross-check transaction activity and manage cash flow.
4. Payment gateway
Payment gateways are commonly used when services are purchased online, such as with online retailers. But they’re also popular to provide a way for B2B customers to make electronic payments. Payments work by giving the payer a link to complete the transaction. This would take them to the gateway where they can pay by credit card, Paypal, or other payment options the payee wishes to add.
Most often, this link would be embedded in an electronic invoice. It’s a common payment solution offered by digital payment providers. Many CRMs or accounting software like Salesforce and Netsuite can integrate with payment gateways.
5. Wire transfer
Wire transfers are popular amongst consumers, with services like SWIFT enabling real-time electronic transfers. Despite its great convenience, it’s a challenging option for businesses as it attracts processing fees of up to $40 per transaction to send money and up to $15 to receive it. If transactions are being made internationally, those figures go up even higher.
6. Cash
Cash is still used, particularly at local B2B businesses within physical proximity. This applies mostly to B2B transactions that are in the $100s rather than $1000s. And in all cases, it is in dealings face to face.
It is never advisable to send cash by mail.
Trends in B2B Payments
Like most aspects of life in the 21st century, the landscape of B2B payments is undergoing significant transformation fueled by digital innovation. There are some important trends that businesses need to be aware of.
1. Digitizing payments
More businesses are digitizing their payment processes to improve efficiency and reduce costs. This shift entails moving away from traditional paper-based methods to digital payment solutions. Embracing digital payments enables companies to streamline financial workflows, automate tasks, and gain real-time visibility into cash flows.
2. Real-time payments
There is a growing demand for real-time B2B payment solutions to enable faster transactions. Real-time payments offer an efficient alternative to traditional methods, allowing instantaneous transfer of funds between trading partners.
This acceleration enhances cash flow management and reduces the risk of late payments.
3. Integration with ERP and accounting systems
Seamless integration with existing business systems, such as enterprise resource planning (ERP) and accounting software, is becoming increasingly important for B2B payment solutions. Why? Simple: a tightly-integrated payment ecosystem ensures that payment processes are synchronized with other core functions, eliminating data silos and enhancing data accuracy for more informed decision-making.
4. Mobile payments
Mobile platforms are gaining traction for B2B payments, offering convenience and accessibility. With the widespread adoption of smartphones and tablets, stakeholders can initiate and authorize payments on the go. Mobile payment solutions have become increasingly common thanks to the less traditional environment many businesses are operating in post-COVID. Mobile payments have grown common as a way to pay remote freelancers or for reimbursing remote workers, in particular.
5. Blockchain and cryptocurrency
Some businesses are exploring the use of blockchain and cryptocurrencies for B2B payments, particularly for international transactions. Blockchain technology offers a decentralized and immutable ledger, enhancing transparency, security, and trust in financial transactions. Cryptocurrencies provide an alternative means of facilitating cross-border payments, bypassing traditional banking intermediaries and reducing transaction costs.
B2B vs. B2C Payment Credit Processing Costs
Business-to-consumer payments will usually be processed under level 1 data. Each transaction will include the standard details needed:
- address verification (billing address and zip code)
- card number; and
- card expiration date.
On the payment processing scale, level 1 is the default, but B2B business owners may find that they qualify for level 2 and level 3 processing, which come with lower payment processing rates. The business has to collect extra information from the payer to qualify for these levels. For B2B companies, this information is usually captured in standard processes, making higher data levels more accessible.
What exactly should a business collect to qualify for level 2 and level 3 card processing? That depends on the credit card brand, as companies like Visa, Mastercard, Amex have different requirements. But to give you a better idea of what to expect, here’s a quick rundown of Visa’s requirements:
Level 2
- all level 1 data requirements
- sales tax
- customer code
- purchase ID
Level 3
- all level 1 and level 2 data requirements
- destination country code
- shipping costs
- order data
- VAT information
- product code
- item description
Read more about how to lower processing rates with level 2 and level 3 processing.
Many commercial cards, including B2B credit cards and other corporate cards, will qualify for level 2 and level 3 rates. This is because business cards have more data registered against them; as such, they present less risk and credit card payment processors can offer better rates.
Any businesses accepting business cards from their clients should inquire about adding level 2 or 3 payment processing for better interchange fees. By working with a service provider like Stax, which offers a membership plus interchange pricing model, businesses can see a real impact from those lower interchange rates.
How to Choose a B2B Payment Processing Solution
The right B2B payment solution saves time, improves cash flow, simplifies bookkeeping and taxes, and increases payment security. Which option is best depends on the size of the business and its needs.
B2B businesses processing less than $500,000 each year may find solutions like PayPal and Square to be sufficient for invoicing and payment automation. However, those processing above $500,000 each year will want a payment provider like Stax that offers a full payment solution with transparent, low pricing and a huge range of integrations to boost the functionality according to the business’s needs. Plus, with an open Payments API, you can easily integrate Stax with your existing solutions to enhance your technology infrastructure.
B2B companies also appreciate our platform’s scalability. You can process payments from multiple locations or verticals and handle large and high-volume transactions easily and securely.
Features to Look for in a B2B Payment Platform
When choosing a payments platform for a B2B company, keep an eye out for features that cater specifically to the needs of business-to-business transactions. Here’s an overview of the key features most B2B companies will require from a payment service.
1. Extensive invoicing tools
Look for a payments platform that offers robust invoicing capabilities, including the ability to create and send professional invoices easily. Features such as customizable invoice templates, recurring invoicing, and automated reminders can help streamline the invoicing process and improve cash flow management.
2. Strong integrations
You should choose a payment provider that is capable of integrating with your existing tech stack. There are two particularly important integrations B2B companies need:
- Integration with your accounting software. This facilitates the reconciliation of payments, simplifies financial reporting, and improves overall accounting efficiency. (Some payment providers do offer the accounting features you may need built-in, so that is also a good option for some companies.)
- Integrates with your existing payment gateway if you have one already. This allows you to accept payments securely through various channels, including online payments, mobile payments, and in-person payments. Many providers do offer built-in payment gateways, as well.
3. Multi-currency support
If your business operates internationally or deals with customers in different countries, set your sights on a payments platform that supports multi-currency transactions. This allows you to accept payments in various currencies and minimize currency conversion fees. This feature is worth looking for if you are considering going international in the future, as without it, you may need to switch providers or otherwise complicate your tech stack.
4. Recurring billing
As-a-service products have become very common in the B2B space. So for businesses that offer subscription-based services or recurring billing arrangements, it’s essential to have a payments platform that supports automated recurring billing. This feature automates the billing process, reduces administrative overhead, and ensures timely payments from customers.
5. Customizable payment terms
Negotiating payment terms and amounts is a common part of B2B transactions. You absolutely should seek a payments platform that allows you to set and customize payment terms to accommodate the unique needs of your B2B customers. This may include flexible payment schedules, discounts for early payments, and extended credit terms.
6. Security and compliance
Ensure that the payments platform prioritizes security and compliance with industry standards such as PCI DSS (Payment Card Industry Data Security Standard). Look for features such as tokenization, encryption, and payment fraud detection to protect sensitive payment data and mitigate fraud risks.
Its time payments software was streamlined, scalable, and secure for big and small businesses alike.
Its time payments software was streamlined, scalable, and secure.
Quick FAQs about B2B Credit Card Processing
Q: What is B2B credit card processing?
B2B credit card processing refers to the systems and methods businesses use to accept and manage credit card payments from other businesses. This process involves transaction approvals, fund transfers, and often includes pre-authorization holds to secure payments.
Q: How do credit card processing fees impact B2B transactions?
Credit card processing fees typically range from 1.5% to 3.5% of the transaction amount. These fees can significantly affect B2B transactions, impacting profit margins, especially for high-volume sales. Understanding and managing these fees is crucial for businesses to optimize their payment processes.
Q: What does credit card pre-authorization mean in B2B transactions?
Pre-authorization in B2B transactions involves placing a temporary hold on a customer’s credit card to ensure fund availability without immediately debiting the account. This is essential for businesses to secure payments, especially in industries like travel or rental services.
Q: How long does a pre-authorization last on a credit card?
Typically, a pre-authorization hold lasts up to five days, but this period can vary based on the merchant’s arrangements and their Merchant Classification Code (MCC). Businesses needing longer holds should consult with their payment processors to adjust these settings.
Q: Why are pre-authorizations beneficial for merchants?
Pre-authorizations provide several benefits, including reduced risk of payment fraud, avoidance of processing fees until final charges are made, and immediate release of reserved funds if the transaction is not completed, enhancing cash flow and customer satisfaction.
Q: What are common use cases for credit card pre-authorizations in B2B settings?
Common use cases include the travel industry, where hotels and car rental agencies use pre-authorizations to secure funds for potential damages or additional charges. Any business needing to ensure payment security for services or goods before finalizing a transaction can benefit from pre-authorizations.
Q: Are there any drawbacks to using pre-authorizations in credit card processing?
The main drawback is the risk of the pre-authorization hold expiring before a transaction is completed, which can lead to the release of reserved funds back to the customer. Merchants must closely monitor the expiration of holds to avoid this issue.
Q: How can businesses optimize their credit card processing systems?
Businesses can optimize by choosing the right payment processors, negotiating better fee structures, and leveraging technology to automate and streamline payment processes, ensuring they minimize costs and maximize efficiency.
