On any given day, $3.1 trillion is owed to U.S. suppliers. Another way of viewing that staggering figure is that on any given day, U.S. suppliers have offered $3,100,000,000,000 in trade credit to their customers that remains outstanding for payment. That’s a lot of zeros and that trade credit comes with a lot of pain.
When a supplier sells a good or service to a customer on credit, they are essentially extending a loan to that customer for the costs of their own materials, labor and overhead. The smaller a company is, the more disruptive that trade credit can be. In order to fund customer orders, suppliers must often take out their own lines of credit with their banks and pay hard interest costs.
Hopefully, buyers will pay their suppliers the invoiced amounts within the timeframe set out by the credit terms. But there is a trend of buyers pushing for longer and longer credit terms, and late payments are all too common.
The pain of waiting for payment
The burden of ballooning payment periods falls heavier on smaller firms. Smaller suppliers have more difficulty setting favorable terms and can be forced into operating as banks for their buyers, taking on risks they may not be able to fully bear. Research from the Trade Credit Dilemma Report shows that suppliers that offer extended payment periods are more likely to experience late payments, reflecting their lack of influence over their buyers.
Buyers paying their suppliers late can have a cascading effect throughout the economy. 67.9% of firms that receive more than half of their payments late experience cash flow problems. These cash flow problems can turn suppliers into late-payers for their own vendors.
These smaller suppliers must balance their desire to grow and invest in their businesses with the constant unavailability of their own resources due to extended payment terms and late payments.
32.3% of U.S. firms report that offering trade credit makes their day-to-day operations more difficult. Nearly 30% say it constrains their abilities to make capital expenditures, expand production or purchase inventory. Additionally, internal resources must be devoted to chasing down coming due and late payments.
Incentivizing faster payments
Suppliers have attempted to combat the “Buy Now – Pay Much Later” culture by incentivizing buyers with an early pay discount for paying sooner. But research done by PYMNTS.com’s 2019 Trade Credit Dilemma Report have shown that these rebates have not been very successful in speeding payment from buyers.
The rebates themselves are a financial burden for suppliers, and buyers value the cash flow benefits of long payments terms and are resistant to shortening them. Interested buyers often have difficulty taking advantage of these discounts because of slow approval workflows caused by manual invoice management.
But there is still potential for speeding payment to suppliers, reducing their DSO and capital costs and increasing cash flow for supplier investment and inventories.
New technology to speed order-to-cash
Suppliers can realize cash from their orders more quickly by using Accounts Receivable Automation.
AR automation grants suppliers several avenues to accelerating cash flow. Electronic invoicing (einvoicing) gets invoices into buyers’ hands faster using email, web portals and other means. Faster invoicing leads to faster payments, which can also be accelerated through AR automation solutions. Accepting electronic payments cuts days off the transit times of paper checks, and automated cash application solutions realize cash faster. Even the collections process can benefit from AR automation, with automated reminders sent out to buyers with invoices coming due and auto-generated daily tasks lists for collectors to help optimize their efforts.
Suppliers frustrated with the “Buy Now – Pay Much Later” culture of their buyers should look at their own AR processes and see if automation and payments platforms can help them reduce their DSO, increase their cash flow and lower their weighted average cost of capital.
Billtrust is the leading innovator in accounts receivable automation. Our connected AR solutions along with our supplier driven B2B payments platform, Business Payments Network, help suppliers realize their business goals every day.
If you’d like to learn about what we can do for your business, please reach out to Billtrust.