B2B Payments

Trade Credit: When ‘Status Quo’ Means It’s Time For A Change

For Eyal Shinar, CEO of Fundbox, understanding the burden that cash-flow bottlenecks and delayed invoice payments have on B2B companies came through personal experience.

His mother, who owned a small staffing business, regularly faced cash-flow constraints as business clients would wait months to pay for staffing services provided. The business grew quickly, but high growth means higher costs. With corporate customers extending days sales outstanding (DSO) for the business, finances were tough.

"She had a revolving line of credit, but it wasn't enough," Shinar told PYMNTS' Karen Webster in a recent Masterclass Video interview. "She just grew too fast to make payments. On paper, the business was doing very well, but in reality, she didn't have enough cash."

The fact is, in the B2B landscape, payment terms that extend several months is the norm — and has been for decades, even centuries. Today, as a result of this status quo, PYMNTS and Fundbox have estimated that more than $1.3 trillion is now locked up within U.S. small businesses' accounts receivable, as small businesses continue to sell to business customers on trade credit.

However, recognizing the existence of a status quo is the first step to making meaningful change. According to Shinar, identifying the impact of a long-standing tradition of B2B sales made on trade credit — and the cash-flow pain it places on small suppliers — was a key driver of Fundbox's services, including its Fundbox Pay offering, which launched last year to allow vendors to request payment on invoices and obtain capital for smoother cash flow.

"The sentence of, 'This is how things have always been done' is a trigger point for innovation," said Shinar.

For years, technological limitations have prevented any meaningful change in suppliers' ability to access capital more quickly. Yet, as technology has evolved and progressed, B2B payment patterns remain the same.

Unlocking Data

The biggest shift in recent years impacting this space, said Shinar, revolves around data: the existence of it, the ability to extract it and the technology that empowers people to analyze it. Enterprise digitization means businesses large and small can now migrate away from paper and spreadsheets, and electronify crucial business information within their accounting, enterprise resource planning (ERP), customer relationship management (CRM), invoicing, procurement and other platforms.

The next step in this data revolution is the widespread adoption of application programming interfaces (APIs) that service providers have embraced to ensure that the data within back-office platforms can quickly and seamlessly move between each other. Finally, explained Shinar, advances in artificial intelligence, machine learning and other data science tools have opened the doors to real-time, highly accurate analysis, empowering professionals to make well-informed decisions.

For B2B transactions, this convergence of data innovation enables third parties like Fundbox to obtain rich information about businesses' finances, and make highly informed decisions about trade credit and payment risk.

"You can pull all data in real time, draw very accurate conclusions about fraud and credit and payment risk, and make a seamless and immediate decision," said Shinar.

Going Beyond Payment Predictability

The B2B cash-flow challenge has moved to the center of many FinTech firms' agendas in recent years, with service providers newly empowered by data analytics, and deploying a variety of solutions to a common problem.

One solution often examined is to promote predictability of B2B payments: Corporate buyers will always want the capital float that comes with establishing 30-, 60- or 90-day payment terms — though, too often, suppliers cannot be certain as to when, exactly, those payments will be made. Establishing predictable payment schedules can allow for small businesses to plan ahead for cash-flow squeezes or surges.

The problem with this tactic, Shinar noted, is that the cash-flow squeeze still exists.

"Something unique about B2B that doesn't exist in B2C is that almost every seller is also a buyer," he said, explaining B2B vendors' own payment commitments that must be met. "Let's say I have certainty — I still need cash now."

By mixing both payment predictability and the accessibility of credit when vendors need it, the flow of money through B2B partners can be much more consistent, and sustain high-growth businesses that will continue to need cash to not only grow, but keep the lights on.

Making Progress

While the technology for change exists, adjusting business payment habits that have been in place for decades isn't going to happen overnight. After all, businesses are run by humans, and even Shinar admitted he still uses the same banking provider because change can be a burden.

Yet, history has shown that change is imminent, he said.

In the world of payments, among the largest disruptors in modern history is the establishment of the credit card networks that allow a seller to get paid immediately while still providing trade credit for the buyer. It's an innovation that largely drove — and continues to drive — economic growth in decades past, but it has almost entirely been driven by consumers.

Now, it's corporates' turn. While change may be slow, there is opportunity to make a meaningful economic impact by lowering that $1.3 trillion burden from accounts receivable departments.

"The next wave of innovation should come from the B2B side," he said. "On the B2B side, the order of magnitude has the potential of unlocking much more value to the system."

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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