Conventional wisdom has it that delaying payments is good for business, but there are now ways for treasurers to get a good deal on their invoice terms without hurting small suppliers, says Neil Radley, Non-Executive Director at Invapay.
Overall the lending figures for SMEs are still way down compared to 5 years ago. The Breedon Report warns of a funding gap by 2017 of up to £191bn. Wouldn’t it be great therefore if the lending problem disappeared (or at least got simpler)? What if we lived in a world where the only real lending needed was for large corporates and that was mainly long term for big capital investment or short term to oil the wheels of industry. What if small businesses were paid within a couple of days of supplying goods and in turn could use the money to fund their suppliers so the need for supply chain finance at punitive rates disappeared?
What we need is a shift in the paradigm in which we operate. The problem today starts with the traditional thinking of your average corporate treasurer and the lack of flexibility in the tools used to manage cash flow across the procure-to-pay value chain. There has been huge investment in sophisticated tools to manage large corporate contracts but what has steadfastly been ignored for many years is the long tail of transactions that all large organisations face.
Traditional models are based on the typical treasurer believing that holding on to cash, and paying as late as possible, must be good for business. Days outstanding is a target to aim for, and indeed on the surface it provides a measurable target and one we can bonus the accounts payable team for extending.
It’s at this point the small business goes after financing from other sources. The good news is that finance is easier to come by, but the bad news is that the supplier pays for it, big time. Invoice discounting/supply chain finance is expensive, especially when you add the time involved in getting to that time and place.
You can see there is a space for a White Knight riding to the rescue. All it takes is a shift in the paradigm in which we think and react to the problem and introduce a system which operates within the new paradigm.
New software on the market now allows payment management in a very different manner. It works on the premise that it’s good to pay suppliers within 3 days instead of the traditional game of leaving payments until 60 days down the line. In return, the buyer makes a small charge of up to 2%. It’s actually great value because 2% will invariably be cheaper than the X% the small business will be paying for its bank finance, and significantly cheaper than the Y% it is being charged by its non-bank lenders.
Buyers can use their own funding or interestingly use their Procurement Cards. The latter allows the use of credit for the buyer, much like an individual uses their own personal credit card. If they play their cards right they can get up to 60 days’ credit, just like they were before, only this time they have already paid the suppliers and so don’t have the hassle of irate customers on the phone. The suppliers now do what all small business employees want to do which is focus on value added activity like product development and selling. They are very happy!
The good news trickles down even further. In turn these suppliers have the cash to pay their suppliers and the economy moves at an even faster pace. Even the Government benefits as the smaller businesses become more profitable through value added business focus and tax receipts grow.
Neil Radley is a Non-Executive Director at Invapay.