Finding The Win-Win In B2B Trade Credit

The practice of B2B suppliers selling to their customers on credit is as old as trade itself, but it is not without its shortcomings. With some sectors like the apparel industry pressing for longer payment terms, vendors are forced to work out how to stay afloat while cash flow gets impeded.

One of the biggest frustrations of the B2B trade credit model today is that buyers and suppliers can often struggle to align payment timing with their own working capital goals and the timing of their own cash flow cycles.

Brad Prout, CEO of Australia-based Finstro, recently told PYMNTS that the trade credit model can create pain points for both buyer and supplier when not managed strategically. As Finstro prepares for its U.S. debut, Prout described how to inject technology into legacy trade credit workflows to find win-win scenarios in both accounts receivable and accounts payable departments.

A Working Capital Mismatch

While selling on trade credit is designed to support the cash flow needs of the B2B buyer, often, the customer can experience significant friction in their own procure-to-pay processes.

The process of setting up a credit account with a vendor can itself be a headache, often taking several days of a paper-intensive workload. With the customer experience growing increasingly important in B2B commerce, this manual experience simply doesn’t cut it anymore for many B2B buyers.

Yet even after a credit account has been established, buyers can still face friction in the form of lumpy cash flow.

“It’s very common for a supplier to offer Net 30 days to their customer, but that customer may actually have an inventory or revenue cycle of 90 days or 100 days,” Prout explained. “There is an inherent working capital mismatch in that relationship.”

On the supplier side, there are plenty of pain points, too.

Most notably, there is the practice of larger corporations requiring lengthy payment terms in an effort to address that working capital mismatch. For many vendors, especially small businesses, ensuring that the large corporate client is satisfied is key to remaining profitable, even when it means months-long delays in receiving payment, or absorbing a financial hit from early payment discount programs.

But it’s that focus on the customer experience that can be a real wrench in sales.

“Once I exhaust credit from Supplier A, then I’m going to go and use my credit that I have at Supplier B,” Prout said, noting that if Supplier B provides a better trade credit experience, they’re likely to secure more sales and a deeper customer relationship.

Today, the practice of extending trade credit to customers isn’t merely an expectation in B2B trade, it’s a point of competitive advantage for the vendors that can offer the most seamless experience.

Driving B2B Trade Digitization

Unsurprisingly, Prout noted that digitization and automation in trade credit workflows is key to providing that better buyer experience and helping suppliers remain competitive. But in the U.S., especially compared to Australia, a lack of B2B payments digitization often makes the workflows of establishing and maintaining trade credit accounts an even greater hassle.

Prout pointed to Australia’s more concentrated financial services and banking landscape compared to the fragmented ecosystem of the U.S. as one key factor that has enabled businesses down under to more efficiently modernize B2B payment and financial management workflows like accounts payable and accounts receivable. But now, he said, the U.S. is on the brink of a shift.

“We believe quite strongly that the U.S. is on a verge of a massive take-up of digital payments,” he said. While there are plenty of factors that have held the U.S. market back, from reliance on legacy ERP systems to the high cost of card acceptance, “A lot of those barriers are being progressively knocked down,” he said. “We are definitely on the verge of a rapid change in the way B2B commerce is affected in this country.”

Enabling trade credit management that addresses friction for both buyer and supplier and is seamlessly embedded into existing back-office infrastructure is key to improving workflows without causing disruption. Addressing each side means allowing vendors to more seamlessly extend credit to customers while also providing buyers more efficient payment options, and identifying how to align payment terms with the cash flow needs of each party.

As Finstro readies its U.S. launch, it will be working with the Visa Fintech Fast Track Program. With B2B payments modernization playing an increasingly important role not just in back-office efficiency, but in working capital optimization, aligning trade credit practices with buyer-supplier cash flow needs could ultimately help businesses strengthen B2B relationships while digitizing their own operations.

“If we are able to provide solutions to both the supplier and the buyer to better align those working capital cycles, and if we do it in a way that is seamless for the supplier to integrate with their business systems, and convenient to adopt for their business customers, then I believe we can help solve a fundamentally large problem that is in the market,” said Prout.