Understanding Afterpay: A Smart Move for Small Business?

Updated on:
September 4, 2023

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The ‘buy now, pay later’ culture has rapidly gained traction globally, revolutionizing how customers approach purchasing. A leader in this field is Afterpay, an innovative payment option originating from Australia, now widespread in the ecommerce marketplace. But what is Afterpay? And should small business owners consider this option to boost their sales volume?

What is Afterpay?

Afterpay, part of the Square family, is a service provider for ‘buy now, pay later’ (BNPL) plans. It breaks down a transaction into four equal installments, which customers pay every biweekly. Unlike traditional credit card arrangements, these installments are interest-free if paid on time. However, late payments may incur fees. Afterpay performs a soft credit check to ensure that the customers can handle the payments without significantly impacting their credit score.

How Afterpay Works for Retailers

Afterpay offers its services both in-store and online. When customers choose Afterpay as their payment method at checkout, they must pay the first payment upfront. The rest is split into three more payments due every two weeks. Afterpay shoulders the risk of late payments or non-payment, ensuring that businesses get paid upfront, in full.

What it Costs Your Business to Use Afterpay

Like most ecommerce platforms, Afterpay charges merchant fees. The cost can vary based on the retailer’s sales volume but is usually a percentage of the transaction amount plus a fixed fee. Despite this cost, the average order value often increases when Afterpay is offered as a payment plan, offsetting the merchant fees and potentially boosting revenue.

Why Businesses Use Afterpay

By offering Afterpay, businesses can attract new customers, especially millennials who are more inclined towards BNPL services like Klarna, Affirm, or Paypal’s ‘Pay in 4.’ Afterpay’s interest-free installment payment scheme can incentivize more purchases from customers wary of traditional credit or unable to spend large amounts at once.

Moreover, Afterpay can help increase your customer base without extensive credit checks. The process does not need a customer’s phone number, bank account, or extensive personal details, making checkout smoother and faster.

Benefits of Afterpay: Advantages for Small Businesses

Increased Sales Volume

Offering a BNPL service like Afterpay often results in a higher average order value. Customers tend to buy more when they can pay in installments.

Expanding Customer Base

Afterpay can attract new customers, particularly millennials who favor alternative payment methods over credit cards or debit cards.

Reduced Risk

Afterpay handles customer credit checks, late payments, and defaults. This reduces the financial risk for your business.

Enhanced Cash Flow

Afterpay pays retailers upfront, improving cash flow. This is particularly useful for small businesses that often struggle with capital.

Considering these benefits, the question is not just ‘how does Afterpay work?’ but ‘how can Afterpay work for me?’

Funding Considerations for Small Businesses

While Afterpay can improve cash flow and revenue, small businesses may need additional funding options, particularly during the initial phases. Merchant cash advances can be a flexible and viable choice over loans or lines of credit.

Unlike loans, merchant cash advances are based on future sales, providing businesses with the funding they need without incurring debt. This makes them an ideal funding choice for businesses integrating services like Afterpay, as the increased sales volume can be directly used to finance the advance.

Conclusion: Is Afterpay Right for Your Business?

Before adding Afterpay to your online store or POS, consider your target demographic, the nature of your products, and the compatibility with your ecommerce platform – popular ones like Shopify often have built-in support for Afterpay.

In a world where convenience is king, Afterpay, with its easy installments, simplified checkout process, and risk management, can be a compelling payment option to offer your customers.

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