Accelerating Early Payment Starts With Realizing the Seller is Giving Customers a Free Loan


My colleague David Gustin recently penned a paper that summarizes many of the techniques and approaches to accelerating early payment in the supply chain. As he frames the argument, “Everyone – including the White House, UK and European public sectors – agrees there are significant benefits that come from accelerating cash in the supply chain.”

Yet while politicians and businesses can agree the benefits of accelerating payments is real in terms of economic impact and supply chain stability, there are underlying challenges in the structural notion of what has led to the need to accelerate early payments. As David observes, “the movement toward early pay acceleration is a response to both structural changes in the broader economy and investment in accounts payable automation and e-invoicing technologies.”

Here’s the crux of the challenge, especially in the context of an environment where payment term duration is typically only moving in 1 direction:

“Most companies may not realize that, by providing goods and services in the form of payment terms to their customers, they are providing a form of loan. Trade credit is inter-firm credit between buyers and sellers that sits on a company’s balance sheet as a receivable or payable. Large companies leverage their position to demand long terms, and this trade credit requires sellers to provide free and flexible funding for their customers. In other words: The seller is giving customers a free loan.”

Yet the irony of this, of course, is that the seller is not necessarily the one granting the loan in the first place – it’s the buyer demanding it, by pushing out terms past 30, 45, 60, 75, 90 or even more days.

The more everyone in industry and government understands this simple point, the more likely there will be progress in tools, such as invoice discounting and reverse factoring, to accelerate early payment at scale – especially if the financing rates are reasonable.

If you’re looking for a summary of how to get started with early payment techniques or accelerate an existing program, do check out David’s paper: Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain. It’s a great introduction to the topic.

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