B2B Payments

The Need For Speed: When Should Merchants Consider Taking Less For Faster Payments?

Slow and late payments are the bane of small business-owners existence. They lead to cash flow problems, and in some cases closures, as SMBs are unable to operate without regular cash flow. Increasingly, as variety enters into the buyer-supplier relationship and electronic fund transfers are additionally available, greater speed is often an option, though usually at a cost that lowers the small merchant’s net take on sales. Should SMB consider consider quicker but lower payments a powerful cash-flow management tool or a Faustian bargain they are being asked to make?

Late invoices are not minor issues for small businesses. Earlier this year, PYMNTS reported on the billions of dollars of unpaid invoices in the U.K. crippling small business, and the rapid rash of closures among Irish companies unable to get payments in a timely manner from suppliers.

However, “late” is a relative term- even invoice paid “on-time” within the legally allowable 120- day window that most buyer-supplier relationships include, still present a sizable economic challenge for firms, particularly small firms where margins are narrow and cash flow is an ever-present issue.

Cash flow is often issue one for small businesses trying to establish themselves, and just managing to stay enough ahead to keep the doors open month-by-month works about as well for businesses as it does for individuals.

And, buyers evaluating suppliers both already know this, and have an increasingly clear view into data about suppliers’ cash flow and what that means for the company’s future prospects.

“If I take a company, for example, under $100 million, what we have found is that if we see a company that begins to deliver late, within three months of that begins to have quality problems, and within two months or less begins to have cash-flow problems and can’t pay their bills on time, we may be seeing the beginning of a company that’s about to have a financial disaster,” David Charpie, Vice President of Supplier InfoNet at SAP told analyst Diana Gardner at the recent 2014 Ariba LIVE Conference, reported IT Director.

SAP’s Supplier InfoNet has partnered with the Ariba Network to help gather and organize the data on the 1.5 million companies that are inter-linked and transacting with each other through Ariba. Using that information, InfoNet can paint a fairly compelling picture and makes some predictions about how companies perform and how they work with each other.

The increased transparency means that suppliers face additional pressure to not only manage cash well enough to stay afloat, but also to make sure that they aren’t appearing as a terrible risk to potential commerce partners.

Yet for such a fundamental issues, it seems to be one that lacks for a unified solution – the problem is certainly well documented, but not resolved. Which is not to say that businesses are powerless in the face of invoice payments, forced to deal with the vicissitudes of buyers and their payment protocols. It does mean that businesses have to be smarter and more nimble when it comes to making sure the money is not just coming in, but coming in when it should.

Speed Vs. Amount: No Easy Answer

An option businesses can consider is agreeing to take a lesser payment for a speedier payout. Attorney Emily Chase Smith, author of The Financially Savvy Entrepreneur: Navigating the Money Maze of Running a Business, notes that rule one is that companies need to know exactly how much and when they are getting paid, reports Bloomberg.

“(Business must be) abnormally, obsessively, ridiculously tuned into cash flow. Until you have a fantastic cushion, you want to know your cash position each and every day, because biggies like payroll and inventory will crush you.”

When to take the lesser payment option depends on other options a business has open.  If a working capitol loan with a low rate of interest is an option for maintain cash-river, holding out for a full payment makes sense. A loan with an interest rate of 10 percent represents less of a loss than a discount of 20 percent.

On the other hand, businesses filling in the gaps using credit cards might needs to think twice about invoice discounts, as credit cards can take a 25 percent bit out of the bottom line, as opposed to a 20 percent loss to reduced pricing.

Automation And Discounting

Automated e-invoicing, which brings with it options such as direct deposit and other electronic payments is an obvious choice, as it lowers processing times associated with the movement of great quantities of paper.

However, the digital revolution when it comes to speeding up business to business payments isn’t just in simple automation, it is also the negotiation on pricing and timing that the digitization allows. When solving for slow payment—solutions can often be “both/and” instead of “either/or.”

Combining automation with discounting is fairly straight forward as there many available services through a variety of B2B supplier networks and Web-based marketplaces that allow customers to both issue electronic invoices and negotiate discount terms.

“As a CFO, I can take an approved invoice and monetize it with a couple of clicks,” John Evarts, chief financial and operating officer at Mediafly and Ariba Network user told the source. And he can flip the equation and offer discounts to his vendors, “who can choose whether to accept concessions on their payments in order to get access to that capital early.”

Making Use of Transparency

As buyers can see suppliers more clearly, so too can suppliers see buyers. On line tools like CreditSafe, collect information on how quickly companies pay their invoices. With insight into the over one million companies on the database, providing a unique window into corporate financial behavior.

While automating is a sure way to speed up the process and potentially lower, or at least regularize costs, the first rule of risk in trade still applies—know whom you are doing business with.

However the use of information goes beyond that. In his comments on using data, David Charpie noted that the cash flow issue goes deep, and the data on it leads to unexpected places.

“Interestingly, what we find is for the pattern that really means something, after those three events. If they begin paying their bills on time all of a sudden, that’s the worst indicator there possibly could be. It’s very counterintuitive, but the models tell us that when that happens, we’re on the verge of someone who will go bankrupt within two to three months of that time frame.”

Businesses need steady cash flow, a fact that is increasingly obvious and transparent. However, businesses also have the tools to innovate, negotiate and research their way to making sure they get their payments on time and their cash flow under control. There is no magic bullet, but there is a combination of solutions.


Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out the February 2019 PYMNTS Financial Invisibles Report

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