There are many reasons why businesses choose to adopt an early payments solution which allows their suppliers to receive payment for their invoices early. Buyers have much to gain: they can increase the stability and resilience of their supply chain, build more collaborative relationships with suppliers and gain greater control over cash flows.
Meanwhile, suppliers who access early payments can reduce the risk of business disruption, overcome cash flow gaps and increase the predictability of their collections. For suppliers, this can be a very attractive prospect: research by Taulia found that over half of small businesses want to be paid early – but in reality, over a third are paid late.
What’s more, the benefits of early payments are even more considerable in today’s challenging market. Late payments has become an even more pressing concern for suppliers during the Covid-19 crisis, as the UK Government’s Small Business Commissioner noted during a recent Working Capital Forum webinar. In many cases, the timing of customer payments can have a major impact on the company’s health.
Two routes to early payments
When buyers decide to offer an early payment solution to their suppliers, there are two main models to choose from. The first is supply chain finance (also known as reverse factoring), in which a funder pays suppliers’ invoices early, minus a small fee, with the buyer paying in full on the agreed date. The second is buyer-funded dynamic discounting, whereby suppliers can choose to receive early payment from their customer in exchange for a discount. The earlier the payment, the greater the discount will be.
From the supplier’s point of view, both types of program provide similar benefits. Suppliers can choose which invoices they want to be paid early, resulting in predictability over cash flows while speeding up cash flows and boosting working capital. But from the buyer’s perspective, there is one important difference between the two options: supply chain finance is funded by a third party, whereas dynamic discounting is funded by the buyer itself.
So while both solutions increase supply chain resilience and stability, there are also some differences where the financial benefits to the buyer are concerned. Supply chain finance enables the buyer to optimize its own working capital, whereas dynamic discounting provides the opportunity to gain an attractive risk-free return on excess cash.
Historically, companies wishing to adopt an early payments solution have had to choose between supply chain finance and dynamic discounting. But deciding between the two options isn’t always clear-cut.
For one thing, some companies may wish to implement both dynamic discounting and supplier financing at the same time, offering one type of funding method to smaller suppliers and the other to the company’s largest suppliers.
And of course, the buyer’s needs can evolve over time. Seasonal businesses may have cash available for dynamic discounting at certain times of the year, but not others. A previously cash-rich company may no longer have cash available for a dynamic discounting program following a major acquisition. Or, as the Covid-19 pandemic has illustrated, a company may need to adjust its business model rapidly, or take action to preserve liquidity during times of crisis.
To accommodate such cases, companies could choose to adopt two separate early payment programs and run them in parallel. But again, this approach is likely to be less than optimal. Different providers will have different agreements and onboarding processes – so attempting to move suppliers backwards and forwards between the two solutions would likely result in a poor experience for suppliers. This, of course, would undermine one of the most important benefits of an early payment solution: namely the ability to improve supplier relationships through a streamlined user experience.
The flexible approach
More attractive is a flexible approach to early payments which enables companies to access the two funding options on an integrated basis.
Taulia’s flexible funding model includes both third-party funded supply chain finance and self-funded dynamic discounting, meaning that suppliers can move seamlessly between the two types of program. Crucially, there’s no need for suppliers to embark on separate onboarding processes or use different passwords. Both solutions are offered via a single early payment platform, so buyers can switch between the two models without any disruption to suppliers.
A retailer, for example, might choose to use dynamic discounting during holiday season, when the company has plenty of excess cash – but during other times of the year, the company might switch to supply chain finance when cash is needed for purchasing stock.
In normal operating conditions, a flexible funding model has plenty to offer – but the Covid-19 pandemic has further illustrated the importance of flexibility. This challenging period has made it clear that businesses that are able to adapt their business models rapidly are better placed to weather major disruptions. As the crisis continues, there’s more reason than ever to adopt an early payment solution that is flexible enough to grow with the business – and continue serving the company and its suppliers during adverse conditions.