When Should Your Company Take Advantage of Early Invoice Payment?

More than any other financial issue, supplier organizations are concerned about receiving payment from customers and receiving that payment quickly.  Often, suppliers may consider early payment opportunities to improve cash flow and working capital, and it can certainly play a part in expediting cash through the Order-to-Cash process.  One question for financial decision makers within these supplier organizations is when to take early payment.  The best time to leverage early invoice payment will vary depending on the organization and the situation. There may be a need for improved working capital during a given quarter and increased cash flow to cover payroll in another. Additionally, suppliers should consider the cost of money as well as the financial health of the customer they are receiving payment from. Regardless of the reason, early payment can help suppliers meet several critical organizational objectives.

The need for working capital

Every business operates by using the cash they have on hand. Ideally, most of that cash will be a result of customers paying in a timely manner rather than financing, but virtually every organization makes strategic decisions to finance at least a portion of their working capital. Reasons for enhancing working capital may include investing in capital projects or other purchases, company expansion, or investment in a marketing campaign. Additionally, guaranteed receipt of that capital may be important, as well as the ability to pick and choose which invoices to finance. Dynamic Discounting, Factoring, and Supply Chain Finance options work well here, while traditional prompt payment discounts may not work as well.

Improving cash flow

All organizations desire positive cash flow. During those times when cash flow is tight but payroll still needs to be paid, it’s worth considering every available early payment option – especially if the cost to accept early payment is relatively low.

Financial health of the customer

If your client is struggling financially, with no guarantee that they will be around for the long haul, it is worth considering early payment via Supply Chain Finance or Non-recourse Factoring, where the obligation to pay the outstanding invoice will remain with the customer. These options are better than waiting in line with other creditors if the customer declares bankruptcy.

Lowering the cost of money

If suppliers are taking early payment at 1% to 2%, that could equate to an APR of anywhere between 12% and 24%—depending on how many days the invoice was paid. Compared to the APR of a secured or unsecured line of credit—significantly lower than 24%—early payment may seem prohibitive. Keeping in mind that early payment mechanisms, such as Supply Chain Finance and Dynamic Discounting, are guaranteed, lines of credit places the risk with the supplier. If the customer does not pay, the supplier is on the hook with limited recourse. Either of the mentioned early payment options may be better than using a line of credit because of the assumed risk.

It may also be tempting to take advantage of early payment for very large invoices, justifying that the enormity of the invoice amount is worth having most of that money in the bank sooner rather than later. This line of thinking should not drive the decision on whether to take early payment.  The cost of money should be considered in addition to the overall financial health of the customer and how well the supplier organization’s finances are managed. Having the money in the bank simply to have it is not a good enough reason. If circumstances surrounding the invoice warrant early payment, such as the financial health of the customers being in doubt, then this approach can be more sound.

An example of available early payment solutions

Basware Financing Services offers several solutions designed to get suppliers paid early.  Basware Advance, a supplier-initiated invoice financing solution, enables suppliers to get paid early by securing funding from an alternative finance provider. Basware Discount is a dynamic discounting solution that enables buyers and suppliers to agree on an early discount schedule.  Basware Pay is a virtual card solution developed in partnership with MasterCard and other global banks to enable companies to pay suppliers early.

Basware Advance is implemented independent of buyer payment schedules. By accessing the data in the network, the financing request, acceptance, risk assessment, and advance payment can be conducted in a matter of minutes.

Basware Advance is unique among alternatives in the market since it combines easy online access to invoice financing with the existing invoicing and approval process. This solution benefits businesses, especially SMEs, by creating visibility over the entire process and giving them agility and flexibility, as well as more instantly available information so they can make faster decisions.

Through these options, suppliers can take payment as cash flow requires, as financing can be achieved quickly based on the terms of the invoice, enabling companies to receive just-in-time financing.

Download the free eBook for a comprehensive overview of early invoice payment

Get a comprehensive overview of early payment and the answers to suppliers’ most frequently asked questions by downloading the free eBook: The Definitive Guide – Early Invoice Payment: The supplier’s guide to understanding early invoice payment options and how to leverage it for improved cash flow.

You can download the free eBook here.