Is Buy Now Pay Later Right for Your Small Business?

6 min read
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Executive Summary

Buy now pay later services offer flexible payment options for consumers, which can open the door to new business for small merchants. However, there are costs for both buyers and sellers—like late fees for unpaid installment payments, and transaction costs for retailers. So, is offering it the right move?

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When it comes to payments, your customers deserve options—but they also deserve safe, responsible options. Buy now pay later (BNPL) technology like Affirm and Afterpay seeks to satisfy both of these, but should small businesses bite?

Here are the fundamentals, opportunities, and risks of using BNPL for your small business, so that you can make an informed decision on whether it’s right for you.

What is buy now pay later?

BNPL, or a point-of-sale installment loan if you want to be fancy, is a fintech financing option that allows consumers to buy products and pay for it later in installments. Thus, “buy now, pay later.”

Popular BNPL companies usually offer a pay-in-four installments option for zero interest, but charge high interest of 25–35% for late payments. Missed payments can also ding a consumer’s credit score. With these two qualities, BNPL is similar to a high-interest credit card.

Buyers can connect their payments to a debit card, bank account, or, in some cases, a credit card.

For merchants, BNPL incurs a transaction fee, typically between 4–8 percent.

Compared to credit cards, which have interest rates of close to 20% and credit card transaction fees of 1.5–3.5%, BNPL can cost more on both sides. Still, the added payment option can open doors for new customers, and there are ways to avoid interest.

The flip side: Small businesses can also use BNPL as a form of low-cost financing. James Loughran, CEO & Founder of Polyglide Ice, has been a small business owner for years. Loughran says, “My company has so many expenses that would cause us to be broke if we paid for it right away, so we use BNPL technology to help.”

The BNPL industry and small business

Did you know? From 2019–2021, the number of originated BNPL loans grew by 970%, according to the Consumer Financial Protection Bureau (CFPB). Meanwhile, the dollar volume of those loans grew by 1,092%.

Small businesses looking to target new audiences have turned to BNPL as a solution. With younger shoppers (millennials and Gen Z) acting as BNPL’s biggest users, this makes sense.

While the apparel and beauty industries have historically dominated the BNPL market, it’s diversifying. Now, personal effects, mass market products, home goods, travel and entertainment, automotive services, and more all hold space for BNPL. This means buying now and paying later could become a commonality for all types of small businesses and their customers.

“The rise of BNPL as a preferred payment method will lead to more non-retail businesses touting it as an option at checkout.” - Amy Gavin, lead competitor strategist, 11:FS.

Types of BNPL

Within BNPL, you can find different types of financing. The most popular BNPL brands are:

  • Affirm
  • Afterpay
  • Klarna
  • PayPal Pay in 4
  • Sezzle
  • Zip
  • Bread

Pros and cons of BNPL for small business owners

Use these BNPL pros and cons to determine whether BNPL is right for your small business:

Pros: Where BNPL excels

  • Higher average order value (AOV): Jeff Vogl, owner of Classic Car Stereos, uses Bread as his BNPL provider. Vogl says buyers who use BNPL spend more than those who use credit cards. Lisa Richards, CEO of The Candida Diet, says her company has seen a 20% increase in the volume of high-value orders within less than a year of implementing a BNPL system.
  • BNPL with interest may offer lower interest rates than credit cards: “Interest-positive programs are traditionally at a lower interest rate than credit cards for the customer,” says Vogl.
  • Accessibility for customers: Offering BNPL payment plans can make your business more accessible and appealing to potential customers.
  • Increased e-commerce conversion rates: Rhett Stubbendeck, CEO of LeverageRx, says, “The small multiple payments help my customers stay within their spending limits and save money without extensive interest or fees. For this reason, BNPL has increased the conversion rate on my website.” This perk could become even more crucial in Q4 when Black Friday and other holiday sales take precedence.

Cons: Where BNPL falls short

  • Long-term, interest-free loans can be expensive for merchants: Vogl says, “The longer the term at 0%, the higher the fee they take from me as the merchant.”
  • Fraud controls may not be advanced. Vogl once had his identity stolen because of BNPL, but admits the hacker was smart.
  • Difficulty with returns: In 2021, 13.7% of individual BNPL loans had at least some portion of the order returned, according to CFPB. Still, returning products bought with BNPL can be tricky because consumers have to negotiate with both the retailer and the BNPL provider. This can downgrade your customer service.
  • Higher merchant fees: Consider the value of BNPL, but don’t forget the higher transaction fees that accompany it.

Our take on how to decide whether to offer BNPL

BNPL has a lot of benefits, and it’s likely worth trying out for a trial period. Over the course of a few months, track all the kinks in the system, try to resolve them, and determine if the benefits outweigh the actual risks.

“In a way, it's a ‘something is better than nothing’ concept,” according to Monica Horn of New York-based e-commerce and in-person floral and gift shop Eternal Roses. Even if you pivot away from BNPL down the line, you’ll get practice in pivoting, an invaluable skill in today’s business market.


1. How can small businesses stay FTC-compliant with BNPL?

The Federal Trade Commission (FTC) takes payments seriously. Small businesses using BNPL must adhere to the FTC Act.

As a BNPL-enabled business owner, you cannot misrepresent the cost of a product, including fees. The FTC adds, “The claim must be true for the typical consumer,” not just some. Online stores must be user-friendly and clear.

In the event of deception or unfair treatment of customers, both retailers and BNPL companies may be held liable.

The gist, according to the FTC, is: “Avoid deceptive or unfair tactics in what you say to consumers, how you convey material information, and how you treat them throughout the lifecycle of the transaction.”

BNPL compliance looks like no hidden fees (aka junk fees, as the White House calls it), transparency around interest rates, clarity on credit bureau reporting, and straightforward calls to action on your website.

2. How do small business owners become a BNPL merchant?

Compare your options by cost for merchant, cost for customer, ease of use, customer service, and any other factors you find important. Sign up for a BNPL platform to become a BNPL merchant.

3. BNPL alternatives

If you’re in the B2B space, you can offer trade credit to buyers as a short-term financing option.

If you can rent your product, that can be a good way to reduce upfront costs for budget-conscious customers.

Teri Shern, co-founder of storage and shipping container company ConexBoxes, used BNPL for a while. Shern says, “One of our priorities is helping people, and if that means that we need to give them the option to pay for a product later, then that’s what we wanted to allow them to do.” However, Shern later decided that offering a rental level made more sense for her business.

Last word on buy now pay later for small businesses

Buy now pay later services offer flexible payment options for consumers, which can open the door to new business for small merchants. However, there are costs for both buyers and sellers—like late fees for unpaid installment payments, and transaction costs for retailers.

Ultimately, these modernized personal loans are changing the game for small businesses. Still, you should thoroughly assess the pros and cons in the context of your own company to ensure BNPL is right for you.

About the author

Rachel Curry

Written by Rachel Curry

Rachel Curry is a freelance finance and investing writer living in Pennsylvania. She wants to act as a bridge connecting the world to the information they need to feel better, be better, and make this planet a better place to live.

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