As customers extend their payment terms – some moving from 15 and 30 days to 60 and 90 days – suppliers have been feeling the crunch. It’s an age-old problem. Significant payment term changes occurred during the great recession (2007-2008) and the height of the COVID-19 pandemic. While supply chains are strained, some supplier organizations are conducting business as usual. With that said, their customers are finding ways to extend their payment terms while still paying suppliers on time – or early. As a result, suppliers find themselves taking advantage of many payment options and mechanisms their customers are providing, such as supply chain financing, virtual cards, and more. These options can help suppliers get paid early, avoid a cash flow crunch and maintain a healthy balance sheet.
Supplier challenges since the pandemic
As supplier organizations navigate a post-pandemic world, leveraging more payment options can mean faster payments and healthier balance sheets. Many customers lost the ability to make timely payments when business slowed down during the pandemic, leaving suppliers to scramble to collect funds. Couple slower payments with difficulty finding a reliable labor force, and you have suppliers experiencing issues maintaining strong cash flow. In addition to a lack of steady cash flow, suppliers experienced rising costs and shortages of necessary supplies.
Customers began taking advantage of full payment terms, creating large accounts receivable balances among supply chains. Suppliers began looking for new customers and servicing larger accounts to speed up collections and improve cash flow. However, finding new and larger customers remains difficult as most businesses remain in a recovery phase and have increased prices to address sales shortcomings.
Understanding the customer’s point of view
Suppliers must remember that customers are having cash flow issues as well, often taking advantage of longer payment terms to remain afloat during these challenging times. When longer payment terms are utilized, customers can divert funds to utilities, rent, and wages. Despite losing the potential vendor discount for early payments, deferring payments is one of the top financial practices businesses employ when cash becomes sparse. Lengthening payment terms is an age-old tool customers use from time to time and allows for business continuity, especially during uncertain times.
Payment solutions available to get suppliers paid faster
Understanding when and why customers use longer payment terms can help suppliers implement procedures that effectively improve their cash flow.
- Virtual cards. One of the new trending payment styles is virtual cards, also known as credit or debit cards but without the physical card. Virtual cards offer a variety of benefits for customers, including points, discounts, and cashback. Not only do most virtual cards offer their users some form of reward, but they can also make paying supplier invoices easier. Instead of going through the tedious process of cutting a check, customer payments are quickly processed through the card’s network. The customer can then pay off the virtual card when funds are available. Customers are often wary of the credit card processing fee associated with virtual cards. However, virtual cards can help suppliers get paid faster.
- ACH payments. ACH payments are often viewed as electronic checks without the paper hassle. ACH payments also eliminate the virtual card processing fees that can add up over time and allow suppliers to receive funds faster, especially with the advent of Same Day ACH. An electronic bank-to-bank transaction can be beneficial for both suppliers and customers. If customers are not currently paying via ACH, suppliers should encourage – and even incentivize – customers to do so. When coupled with electronic invoicing, ACH payments can streamline the entire accounts receivable process.
- Dynamic discounting. Dynamic discounting is also a viable solution to speed customer payments. Many suppliers offer a 2% discount for payments received within ten days of the invoice date. This practice encourages customers to pay early, and the savings to the customer can add up depending on the size of the invoice. Many customers now have online dynamic discounting platforms in place, allowing certain suppliers to utilize a sliding scale to choose when they will be paid and how much of a discount they will accept. Not only can dynamic discounting give customers the ability to save money, but it can give suppliers the needed cash flow to successfully run their operation and meet customer needs.
- Supply chain financing. Another solution for your cash flow needs is to offer supply chain financing. Many businesses secure a line of credit through their bank, allowing them to draw on it when needed. Supply chain financing is similar, as it enables customers, or suppliers, to access funds early from the customer’s financial institution while ultimately paying the invoice balance later. Supply chain finance is a short-term credit agreement, but it is not a loan. Instead, supply chain financing is considered an extension of the customer’s accounts payable. Funds via supply chain financing can be offered through a financial institution or a non-bank third party.
- The practice of factoring involves a supplier selling specific invoices, or receivables, to a finance company or a lending institution providing factoring services. The lender discounts their payment to the supplier by a fixed percentage, representing their fee for financing. To engage the services of a factor, the supplier must first submit invoices to the factoring company. The latter assesses the invoices, including the supplier’s eligibility and the customer’s ability to pay. If acceptable to the factor, a financing agreement is established.
Both customers and suppliers are test-driving available payment options, but more innovation and opportunities may be on the horizon. Virtual cards, ACH payments, dynamic discounting, supply chain financing, and factoring are a few options suppliers have turned to when customer payments are slow. Ultimately, choosing the right mutually beneficial solutions for suppliers and customers will take due diligence and research. However, many parties on both sides of the equation find value in doing business this way.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He previously chaired the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.