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Early payment used to sweeten business deals

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The effects of Covid-19 see early payments used as a tool for sweetening business deals and managing working capital.

23rd Feb 2022
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Funding SME trade has ballooned from $1.5tn to $3-5tn during the pandemic, according to The All-Party Parliamentary Group’s Trade and Export Promotion’s review into trade finance. 

With suppliers typically needing funds to finance production, pre-shipment warehousing and the costs of shipping, nearly 40% of companies are now using early payment to manage their working capital (compared to only 19% in 2017) according to supply chain finance specialists, Taulia.

Over a five-year period, Taulia analysed the data from nearly 80,000 survey respondents for its latest supplier sentiment survey to reveal that there has been growing interest from suppliers in regularly receiving early payment once an invoice is approved as an alternative source of finance. 

In 2021, one-fifth (22%) of suppliers were interested in receiving early payment every time for every customer, compared to 15% in 2017.

Bridging the cashflow gap is cited as the main reason for taking early payments for 47% of businesses, while the need to bolster working capital was cited by 21%.  Predicting collections and payments is the main reason says 27% and a further 7% of businesses say they use early payment to reduce Days Sales Outstanding (DSO).

According to research, late payments fell from 45% in 2017 to 36% in 2021. However, late payment is expected to rise again as payments held in abeyance during the height of the pandemic now begin to fall due and businesses juggle liquidity.

Despite numerous statistics from the International Chamber of Commerce showing that trade finance is a low credit risk, the stock phrase that ‘trade finance is a high financial crime risk business’ is being blamed for the £2bn gap for SME funding in the UK.

Businesses dealing with developing markets are finding mainstream banks restricting accounts for certain business types or geographic market, leading to additional compliance costs for banks and financial institutions.

For a bank, the cost of onboarding a SME customer was estimated to be £60,000 owing to the cumbersome, duplicative and most manual bureaucracy surrounding the onboarding process according to The Cole Commission.

“The success of any finance programme is ultimately driven by the strength of the technology underpinning it,” says Tony Duggan, CEO, Crossflow. 

“You need to select a robust platform with proven technology that works within the operational framework of your organisation, including integration accounting systems such as SAP Financials. Not only does efficient process automation enable a frictionless user experience, but it saves time, and strengthens supplier relationships and their long-term sustainability.”

“The financial health of suppliers is paramount to building robust supply chains,” said Cedric Bru, CEO, Taulia. 

“This year has seen significant disruption to supply chains due to a wide range of external factors, but adequate financing shouldn’t be a barrier. Our research shows that suppliers have developed an increasing readiness to request frequent payments which aid cashflow gaps, whilst buyers are more frequently recognising their importance in supporting the supply chain. The emergence of new technologies is helping businesses to adopt good corporate behaviour and pay their suppliers faster.”

Being able to offer early payments can be used to sweeten the deal in potential new negotiations and can put businesses ahead of their competitors. Early payments are growing as a tool and fast becoming a way to maintain the often-volatile buyer/seller relationship. 

Over 20% of businesses say they are willing to take a discount on payments in exchange for being paid ‘early every time’, whilst 16% say ‘most of the time’, but surprisingly 37% of businesses say they would prefer to wait for the full amount instead of offering a discount for early payment.

Businesses will need to have in place the right infrastructure and develop greater agility regarding payments if they are to fill cashflow gaps and manage their liquidity.  Understanding the potential of early payments gives rise to other styles of working capital management, improves supply chain health, and supplier happiness.

If businesses are to succeed, they will need to be prepared for a wide range of eventualities especially as we continue towards a post-pandemic future.

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