Almost 37% of UK residents have used a “Buy now, Pay Later” scheme to purchase products. This type of payment is becoming increasingly popular across the globe, especially amongst millennials. In this article, we will discuss the advantages and disadvantages of using deferred payments and how they translate in your balance sheet.
Deferred payments are payments that are partially or fully postponed for a certain amount of time. Individuals will not pay interest in the deferred payment for the time agreed, however, this loan starts accruing interest if payments are delayed. One of the most popular types of deferred payments is the “Buy Now, Pay Later” or BNPL scheme.
The term ‘deferred payments’ can also be used in other industries such as in real estate and education. Though the usage of this term may vary, the meaning stays substantially the same. Deferred payment agreements state the conditions that the seller and the buyer agreed on before the purchase.
Deferred payments have implications in a company’s balance sheet, which are relevant for accountants and finance teams.
For example, for sellers and lenders, a deferred payment is seen in their balance sheet as “accrued revenue”: they have provided the goods or services to the customer, but haven’t received the payment yet. In this case, the delivery of goods comes before the payment. For borrowers, a deferred payment is seen in their balance sheet as “accrued expenses”: they already have the product, but haven’t paid for it yet- so it is still a pending payment.
Deferred revenue is, naturally, the opposite of accrued revenue: when companies get their payment first, and provide the products after. Deferred revenue is seen as a liability for companies, because they haven’t yet provided the service to customers. An example of deferred revenue is prepaid insurance policies, where customers need to pay before getting anything in return.
Companies are likely to perform a soft search on your credit report to find out if you are eligible for deferred payments or not. Soft searches will show up on your credit report for a period of 6 years, but won’t actually affect your credit score in any way. Only you are able to see these soft searches- companies aren’t. Therefore, it doesn’t matter how much soft searches you have in your report.
The higher your credit score is, the bigger chance you have of being approved. Providers set up a spending limit based on your credit rating. You may get a lower limit at first if you are a new customer. This limit is likely to grow overtime if you continue paying your credit bills on time.
Deferred payments allow customers to purchase products when they may not have the funds yet to pay for them in full. Spreading out a payment over the course of weeks or months may make it easier to manage your cash flow. When paid on time, deferred payments may also increase your credit score, as they show lenders that you are reliable and can pay your credit bills on time.
However, deferred payments are never written off and still need to be paid in full, so it is important to consider if you will have the necessary funds in the future. Deferred payments also acquire interest over time, usually on a compound basis. This naturally means that you will end up paying more than the initial cost. On top of that, companies or banks may charge you late payment fees, or a lump sum of accrued interest.
Usually, a deferred payment doesn’t cost anything. Every company or financial institution that offers deferred payments has its own terms, so payment periods may vary. For example, you may get an interest-free deferred payment agreement for 30 days or several months. If you don’t pay within this time period, you will face some kind of penalty: usually accrued interest or late payment fees.
You may also be able to borrow for longer periods of time. For example, a bank may offer you a deferred payment of two years, during which you will pay interest monthly until you pay back all your credit.
The most popular BNPL company is Klarna. From January 2020 to July 2020, Klarna had 986,000 downloads in the UK (Finder report), and currently counts with around 8 million UK users. The Swedish company is followed by My Argos Card, Clearpay, Laybuy and Openpay.
PayPal has also launched its “Pay in 3” feature, allowing companies to give their customers the option to split their payments into three installations. Some companies work exclusively with one third-party BNPL provider, so customer’s options may be limited. The UK retailer M&S, for example, only offers Clearpay services to their customers.
Imburse connects companies with the entire payments ecosystem. Through Imburse, your company can easily and quickly connect to any payment provider or technology of your choice, avoiding the hassle of single integrations. This means you can support any payment methods and schemes all across the globe, including BNPL. If you are interested in knowing more about Imburse, reach out to our team below.