In this article, we take a closer look at the concept of recurring payments and explore their role in the context of financial transactions between businesses. Keep reading to learn how they work, what they bring to accounts payable (AP) and accounts receivable (AR) teams, and which features to expect from a B2B bill pay platform before you implement recurring billing.
What Are Recurring Payments in B2B?
In B2B, a recurring payment is a payment between two companies that repeats on agreed terms: a SaaS licence, an equipment lease, a maintenance contract, logistics services or regular supplies of consumables. Unlike consumer subscriptions, B2B recurring payments are tied to contracts and payment terms such as Net 30. They often involve larger and variable amounts and pass through the buyer’s accounts payable (AP) process before they are paid. For the basics, see our recurring payments glossary.
Push and Pull Payments: What’s the Difference?
Recurring transactions can be divided into two categories:
- Push payments. Recurring push payments require customers to initiate each transaction, for example by scheduling a bank transfer or paying an invoice in its own bill pay system. This means a high level of control for consumers but may cause uncertainty for businesses.
- Pull payments. This recurring payment type enables businesses to automatically withdraw funds on the due date by card on file, direct debit or ACH debit, giving them more control over the payment process. Such predictability is a major driver of subscription companies’ ability to forecast revenue and leverage growth opportunities.
Ultimately, the choice between push and pull payments depends on the specific needs and preferences of the parties involved in the transactions and the niche to which they belong.
For instance, businesses operating in industries with subscription-based models, such as SaaS companies, often prefer pull payments because they provide predictable revenue streams and facilitate customer retention. On the other hand, in the consultancy sector, where billing is often based on project milestones or service usage, push payments are more common.
How Recurring Payments Work Between Businesses
- Contract and payment terms. The parties agree on the billing cycle, payment terms, currency and payment method.
- Authorisation. The buyer signs a direct debit or ACH mandate or keeps a corporate card on file. In push flows, it schedules payments in its own bill pay system instead.
- Invoice. The seller’s accounts receivable (AR) system issues an invoice every cycle. For variable payments, the amount is based on usage or volume.
- Approval. On the buyer’s side, the invoice goes through an AP approval workflow. For pull payments, approval is given once in advance, usually with an amount limit.
- Payment. The seller collects funds on the due date, or the buyer sends them.
- Reconciliation. Both sides match the payment to the invoice in their ERP and accounting systems.
Key Benefits of Recurring Payments in B2B
Nowadays, B2B companies are starting to actively leverage recurring payments due to the variety of benefits they offer, such as:
- Improved financial stability. Regular billing cycles enable better control and planning of an organization’s cash flow. Besides, they tend to boost the companies’ overall financial resilience.
- Administrative efficiency. Payment automation reduces manual work for AP and AR teams, cuts errors and duplicate payments, and frees up resources for core business functions.
- Fewer late payments. Autopay removes the need to chase invoices, which helps lower days sales outstanding (DSO) on the seller’s side and avoid late fees on the buyer’s side.
- Competitive edge. Businesses that offer convenient payment options have a competitive advantage on the market and often report increased customer satisfaction scores.
- Better scalability. Unlike one-time sales, which require constant acquisition of new customers to sustain growth, recurring revenue models offer fertile ground for business expansion.
As you can see, recurring pull payments give companies more freedom to focus their resources and efforts on core operations rather than payment flow. This is especially crucial for B2B commercial relations as they often involve large sums of money, longer payment cycles, and complex invoicing and billing processes that need to be managed efficiently and reliably.
Summing Up: Is It Worth Integrating Recurring Payments?
Overall, implementing recurring payments into B2B commerce can be highly advantageous for companies. However, it is critical to thoroughly assess the suitability of this payment model depending on your business’s nature, the dynamics of the industry it operates in, and the preferences of the parties involved in the transactions.
Here are some questions business owners need to ask themselves before adopting recurring payments:
- How common are recurring payments in our industry, and what can we learn from competitors?
- How would recurring payments impact our revenue and cash flow?
- How will implementing recurring payments affect our operational processes, and are we equipped to handle any necessary changes efficiently?
- Will we offer flexible subscription options? If yes, how will it impact customer satisfaction and retention?
Answering these questions will greatly help you make an informed decision about the suitability of recurring payments for your line of business.
If they end up being feasible for your specific use case, implementing them is guaranteed to be an excellent additional opportunity to position your company competitively within the industry while meeting the evolving needs and expectations of your clients and partners.
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