B2B Payments: Understanding the Nitty-Gritty of Business Transactions
B2B payments refer to the transfer of value in currency from a buyer to a supplier for goods or services supplied. This type of payment can be either a one-time or recurring transaction, depending on the agreement made between the buyer and supplier. B2B payments are more complex than business-to-consumer or B2C payments since the payment processing requires more time to approve and settle the transaction, which can take days or weeks. In contrast, B2C payment processing is typically settled on the spot.
There are several types of B2B payment methods available, including paper checks, ACH payments, wire transfers, credit cards, and cash. Each method has its own set of benefits compared to the next. However, checks remain the most common method of B2B payment, with 80% of all business-to-business payments made through this method.
ACH payments, on the other hand, are electronic payments that have become increasingly popular in recent years. The National Automated Clearing House Association reported that the ACH Network processed 24.7 billion payments in 2019, with 93% of workers receiving payment through direct deposit. Wire transfers represent less than 1% of the total number of B2B payments, but make up 93% of the total amount since they are often high-value payment transactions. Credit cards are not overly popular in the B2B payment world, since some vendors prefer to avoid the 3-4% processing fees that credit card companies often charge. However, cash remains a surprisingly common form of B2B payment, with 70% of small businesses still accepting it as of 2019.
The world of B2B payments can be challenging and is getting increasingly more complicated. With accounts payable work already a sometimes-thankless chore of hitting deadlines and keeping vendors and contractors satisfied, a global pandemic and other pressures in 2020 have added a whole another layer of tension. However, those who can rise above the tension can be richly compensated, with global payment volume in the B2B space estimated at approximately $120 trillion in recent years.
Despite technological advances, B2B payment methods have their own set of issues, particularly for methods that aren’t made electronically. It can be challenging to show proof of cash payment to a vendor, and processing and document reconciliation will take longer than it should with electronic solutions. ACH payments, wire transfers, and credit cards make the process go a little smoother, though companies that hope to encourage these types of payments without implementing a fully-integrated, payment agnostic accounts payable automation system are likely leaving money on the table. Traditional, non-automated payment systems drive up invoice processing expenses, offer poor visibility, less actionable data, and longer payment cycles. In 2020, the problems are only getting worse due to the COVID-19 pandemic and its cascading impacts.
What Are B2B Payments?
B2B payments, or business-to-business payments, refer to transactions made between two companies, as opposed to B2C payments (business-to-consumer payments), which are transactions made between a business and an individual. B2B payments come in different forms, including wire transfers, credit cards, electronic funds transfers (EFT), and Automated Clearing House (ACH) payments.
Types of B2B Payments
Now that we have a basic understanding of what B2B payments are let’s look at the different types of B2B payments.
A wire transfer is an electronic payment service that enables funds to be transferred from one bank account to another bank account quickly. Wire transfers are the preferred payment method for businesses that require urgent payments, such as paying vendors for supplies or paying employees for overtime work.
Credit card payments are another popular payment method for B2B transactions. Businesses can use credit cards to pay for goods and services, and many credit card providers offer rewards programs that incentivize using their cards for business transactions.
Electronic Funds Transfer (EFT)
Electronic funds transfer (EFT) payments are an electronic payment method that allows funds to be transferred from one bank account to another bank account electronically. EFTs are commonly used for recurring payments, such as paying rent or mortgage payments.
Automated Clearing House (ACH) Payments
Automated Clearing House (ACH) payments are a type of EFT payment that is used to transfer funds between bank accounts. ACH payments are often used for direct deposit payroll, paying vendors, and paying bills.
How B2B Payments Work
B2B payments work similarly to B2C payments in that they involve the transfer of funds from one party to another. However, B2B payments tend to be more complex, involving multiple parties, longer payment cycles, and higher transaction volumes.
In a typical B2B payment transaction, the buyer sends a purchase order to the seller, indicating the goods or services they want to buy. Once the seller receives the purchase order, they send an invoice to the buyer, indicating the total cost of the goods or services. The buyer then pays the seller, either through wire transfer, credit card payment, EFT payment, or ACH payment.
B2B payments are a crucial part of any business’s survival, and understanding how they work is essential for success. We’ve discussed the different types of B2B payments, including wire transfers, credit cards, EFTs, and ACH payments. We’ve also explained how B2B payments work, including the steps involved in a typical transaction.
Understanding the nitty-gritty of B2B payments is a must for any business that wants to thrive in today’s economy. By knowing the various payment methods available and how they work, businesses can make informed decisions about which payment methods to use, allowing them to save time and money while increasing efficiency.
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