While there are many unknowns about the long-term financial impact of the pandemic on businesses, a few scenarios are likely to occur.
Economists are predicting a wave of bankruptcies, which could hit the small- to medium-sized business (SMB) community particularly hard. As those businesses fight to survive, SMBs are also facing another massive pain point: late payments.
Delaying B2B payments has long been a cash flow tactic for corporate buyers, while small vendors are often incentivized to accept longer payment terms, preferring to support customer payment habits rather than risk damaging a buyer-supplier relationship. But with the pandemic wreaking havoc on economies throughout the world, it's likely that the late payments friction is about to get much worse for many SMBs.
That's one prediction from David Landsberg, co-founder and CEO of newly-launched Peasy. As a company that incentivizes companies to pay their invoices earlier, Peasy is aiming to address some of the cash flow issues that have yet to fully materialize as the fallout from the global pandemic comes into clearer view. Speaking with PYMNTS, Landsberg explained that the volatility remains high as businesses begin to fully understand their current cash flow predicaments.
"Now, it's a mess, and no one knows the rules anymore," he said of the pandemic's impact on B2B payments. "There is too little trade to gain good insight into how people are paying their invoices, but it's clear that cash really is king, now more than ever."
A Diminishing Safety Net
There is some data emerging that paints a not-so-optimistic picture about B2B payment practices today as a result of market volatility. Adding to the challenge, noted Landsberg, is that in a pre-COVID-19 world, businesses would typically rely on external financing to support their cash flow needs as they wait for invoices to be paid. In a post-pandemic market, however, a high volume of government debt on businesses' balance sheets could lead to another retreat from lenders.
"I think the days of borrowing are changing, and it's going to be much more difficult for businesses to borrow," he said. "That's going to be a shock to businesses."
That's not the only ugly surprise that may be lurking for many companies that are gradually restarting operations.
For many SMBs in manufacturing, for instance, a high volume of invoices issued before the pandemic hit are likely going to be written off as uncollectible, said Landsberg, thanks to tightened belts and the reality that many firms that were once customers are no longer in existence.
With a lack of financing a growing threat, and more invoices likely to go unpaid, early payment discounts will be a crucial lifeline for small vendors.
A Dynamic Incentive
Peasy recently announced its emergence onto the market to enable SMBs to implement an early payment discount program with their corporate customers. Paying invoices early in exchange for a discount is not a new concept, but Landsberg noted that traditional initiatives aren't always effective or beneficial for a small vendor.
It's not uncommon, for example, for a corporate customer to agree to an early payment discount and then never actually pay early, leaving SMBs to accept 95 percent payment on an invoice with regular 30- or 60-day payment terms. Many of those early payment discounts are static, too, he noted, and lack much incentive for a business to let go of funds more quickly.
Peasy aims to address this by acting as a third party that does not only ensure agreed-upon early payments are actually made, but also implements a more flexible program with a key difference to traditional strategies: Rather than implement a discount on an invoice, corporate customers receive a rebate. As a result, the earlier a company pays, the larger the rebate.
Landsberg noted that the company is attempting to get ahead of a cash flow problem some firms haven't fully recognized yet, although it remains anyone's guess exactly what the market will look like — and which B2B payment patterns will emerge — in the coming weeks and months.
Rather than simply relying on the good will of a company to pay an invoice in a timely manner, it's time for SMBs to incentivize their corporate customers to accelerate payments.
"The businesses we are most suited to serve — wholesale, manufacturing — they're just starting to get back to work, and they're going to be in a shock," he said. "It's not just about good will anymore. Getting your customer to pay early is about getting your invoice on the 'I'm going to pay these' pile because it's in the best interest of the customer to do so. The rules have changed."