Exploring the History of Open Account Trade and Early Payment Programs


To understand how to most effectively, affordably and sustainably accelerate the flow of cash in the supply chain for all parties, understanding the history of the market itself is essential. An understanding of the structural changes that have taken place with purchase-to-pay (P2P) technologies in recent years, which stand to usher in a new era of early payment programs, is vital as well.

My colleague David Gustin recently penned a paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain, that provides a great overview of the topic for those just getting into it or looking to accelerate their knowledge of the different programs available from procurement and accounts payable perspectives. But even before exploring these options, it is important to understand the evolution of transactions between buyers and suppliers.

As David suggests, “Banks tend to refer to trade credit as open account transactions, where goods are shipped in advance of payment. This type of credit can be the largest use of capital for most businesses. While banks are the main third-party source of financing for corporate trade through both direct and indirect loans, they intermediate only 20% of trade credit. Simply put, most trade credit is not intermediated directly and remains on corporate balance sheets.”

Technology is in the early stages of having a potentially massive impact on how this market is evolving – and could dramatically increase the 20% of trade credit that is intermediated today. As David observes, technology can move businesses away from the offline challenges of the lending past:

Before the advent of A/P automation technology, sellers had few options to accelerate payment.
 While the practice of offering discounts for early payment goes back decades, the general uptake of discounts has been low. Suppliers typically had to wait for the buyer to pay them on value date or later, if included in their procurement contract. In theory, suppliers could take advantage of some 2% or net 10-day payment scheme – assuming the invoice was processed quickly enough – but the latency in the invoice submission and approvals process has greatly limited adoption. As an often higher-cost alternative, some suppliers would sell their receivable to a factor who would collect on the seller’s behalf and pay the seller an advance rate before collection.

Early payment techniques can be complicated. They often rely on underlying P2P, e-invoicing, supplier network and other related applications and cloud-based solutions that are rapidly evolving. As a level-set to learn more about how to segment and think about the early payment opportunity from procurement and accounts payable perspectives, the recent Trade Financing Matters paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain, is a great reference document to get up to speed fast.

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