Innovations in payment and financing services are changing the way that organizations around the world conduct business.
This financing transformation is being driven by a business commerce environment that has been plagued by late payments and tight cash flow during the past few years, which have particularly impacted small to mid-sized suppliers.
Several factors have contributed to this culture of late payments, including a business environment with poor financial processes, and in some cases, a lack of automated invoicing and payment systems. Another contributing factor is that many companies have been holding onto their cash as long as possible to improve their working capital.
Fortunately, the advent of alternative financing services, innovations in e-invoicing and payment technology, and increasing market demand are sparking a new era in B2B commerce.
Following are some trends, issues and developments that are enabling this transformative shift:
Out with the old, in with the new. Traditionally, B2B payments and financing have been siloed and costly. For example, the payment and financing processes of traditional solutions were separate from the actual supply chain of a business. And those that tried to align them, such as factoring and supply chain finance companies, typically offer expensive solutions or pay suppliers only about 80% of receivables. Business commerce networks, which already automate purchase orders and invoices as an integrated part of a company’s supply chain, can easily leverage that data to generate payments as well, which will soon make traditional payment methods, such as credit cards, checks and expensive bank wiring fees, things of the past.
Just-in-time financing is becoming a reality. Lenders are starting to leverage online business commerce networks, which companies use to send and receive e-invoices, to offer financing services at the individual invoice level. Financing can be triggered by events in the network such as approval of a purchase order, receipt of an invoice or approval of an invoice. This gives borrowers just-in-time access to capital, while enabling lenders to benefit from new financing opportunities with minimized risk.
Payments and financing are more strategic. Visibility into key data shared over business commerce networks gives companies more control over their payments and cash flow. With critical invoice information at your fingertips—such as what you are buying from whom, for how much and when, your overall spend with each supplier, your outstanding liabilities, and more—you are in an ideal position to manage your payments strategically. You can implement a payment strategy to determine who you will pay, when, and how you might finance it. At the same time, suppliers now have more cost-effective options to receive early payment or finance their receivables to increase their cash flow.
Government initiatives are applying pressure to help move the status quo. Governments around the world have been building infrastructure and legislating e-invoicing to reduce fraud, track tax compliance, increase efficiencies and achieve other benefits. At the same time, they have been encouraging solutions to address the issue of late payments. For example, President Obama’s Supplier Pay Initiative is encouraging companies to pledge to pay small suppliers faster or provide a financing solution to help them access working capital at a lower cost. The EU has established the Late Payment Directive to protect SMEs, in particular, from long payment terms which often result from cross-border trade. The U.K, has additionally adopted the Prompt Payment Code, which is a voluntary agreement to promote good payment practices to pay small businesses in a reasonable timeframe.
The combination of new solutions, growing market demand and government impetus are paving the way for this year of B2B payment transformation. Better financing terms and improved cash flow put buyers and suppliers on equal footing and, as a result, strengthen their relationships. In this new era, the logjam of trapped cash finally opens up, providing more opportunities not only for business growth, but also for the economy as a whole.
Ad van der Poel is senior vice president of financing services for Basware.