The B2B ecosystem's reluctance to change has made it an industry with unique habits.
The tradition of vendors selling to their customers on credit, then waiting weeks or months to receive payment after goods or services are provided, may be a valuable cash flow strategy for corporate buyers. But for many suppliers, this tradition has created a cash flow crunch.
PYMNTS analysis estimated a $3.1 trillion squeeze on B2B suppliers in the form of outstanding receivables on any given day. As B2B FinTech innovation accelerates, new solutions emerge to tackle the issue of delayed and late B2B payments, including early payment discount programs, supply chain financing and accounts payable (AP) automation tools.
But many of these solutions target the buyer with a tactic of encouraging a change in payment behavior. A new solution from risk management and payments technology firm linked2pay, however, places the power of accelerating B2B payments on the vendor.
Its newest offering, CustomerConnect, onboards B2B customers to automate credit underwriting and/or B2B payments, automatically debiting that business's account based on agreed-upon payment terms. While the value proposition for suppliers is clear, it's unlikely that every corporate buyer will be eager to opt for the service as more companies extend payment terms to hold onto much needed capital.
In a recent interview, linked2pay CEO Robert "Jay" McShirley told PYMNTS why it's time for vendors to retain control of accelerating invoice payments.
A Legacy Of Delays
"There aren't a lot of companies out there with quality products that are looking to finance other people's companies," McShirley said, echoing a growing sentiment about the risks and challenges of B2B suppliers essentially extending free credit to buyers by accepting late and delayed payments.
While trade and commerce has evolved toward new business models like subscription and pay-as-you-go, the B2B arena continues to rely on decades-old practices that lean on trust between buyer and supplier for payments to occur.
It's perhaps not surprising that, when a company holds the leverage in a buyer-supplier relationship, payment terms are extended out as long as possible. Today, late B2B payments are a particularly lofty concern in verticals like clothing and apparel.
Researchers at SideTrade have taken to analyzing B2B payment delays, finding a correlation between lengthening days sales outstanding (DSO) and markets hit hardest by the coronavirus pandemic. It's understandable that in times of a market downturn, holding onto capital as long as possible can be a strategy of survival.
But McShirley emphasized the domino effect that delaying payment has on the broader economy.
"What you don't realize when someone is paying late or they want that flexibility is that it's impacting other customers of that merchant," he said. "They're not able to extend the best prices they could because they don't have certainty of payment."
Embracing Choice And Speed
There are benefits for corporate buyers of setting up auto-pay, including lower administrative burdens for AP teams that no longer have to manually initiate transactions. McShirley noted that the automated dispute resolution service integrated into the CustomerConnect offering can help buyers prevent over-paying, while adding that the solution's support for an array of payment methods is also key to ensuring corporate payers have choice in how they settle their invoices.
That's not to say, however, that there won't be challenges among some vendors in convincing their corporate customers to sign on for the service.
"Do I expect every business to embrace this right off the bat? No," said McShirley.
But, he continued, it's imperative that the B2B ecosystem move in this direction, particularly for suppliers providing physical goods that are nearly impossible to take back in a case of non-payment by a customer.
It's also important to embrace automated, on-time B2B payments to ensure that companies are prepared for a new market where faster payments are the norm, McShirley added.
While linked2pay still sees a significant volume of check payments, faster and real-time payments like Real Time ACH will significantly disrupt the ecosystem, B2B payments included. The legacy ways of delaying B2B payment for as long as possible and manually initiating a transaction are on the way out, he predicted, and organizations should prepare.
For some companies that have historically relied on trade credit and delaying invoice payments to manage working capital, that could mean setting up other financing agreements or adjusting their own internal mindset to no longer use vendors as a financial crutch.
"There's going to be some getting used to, but the world of faster payments is upon us," he said. "Businesses are going to have to be better prepared and better financed if they want to do business in a new world."