How Credit Managers stand to benefit from Early Payment Programs

By Guy Saxelby*

As the person primarily responsible for managing credit risk in their organisation, Credit Managers must be able to demonstrate the value of their workplace contributions against specific metrics to senior management.

The VUCA (Volatility, Uncertainty, Complexity and Ambiguity) nature of today’s business environment drives companies to keep tight controls around both accounts payable and accounts receivable. Credit resources are limited and expectations for seasoned credit professionals to do more with less has become the new norm. Reductions in DSO, customer collections, credit risk management, AR, disputes, profit margin protection and sales engagement to identify growth opportunities are typically all measures within a credit manager’s remit.

In many organisations, Credit functions are often seen as blockers by Sales departments, and Sales are seen by Credit as discount brandishing cowboys. This trend has resulted in organisational growth and risk management becoming conflicting ideologies. The age old battle between Credit and Sales however need not always exist. Practises have evolved where the two can work harmoniously to help achieve company revenue goals without damaging an organisation’s ability to manage risk and control payment delinquency to acceptable levels. Early Payment Programs are just one of these practises.

One of the best ways to improve a company’s cash flow and achieve a reduction in DSO is to speed up payment times for the payment of customer invoices. Traditionally, invoice factoring has been one method for achieving this however it is unlikely that organisations will want it known to their customers that they are soliciting the services of factoring companies. Should an invoice remain unpaid at the expiration of payment terms for an extended period of time, factoring companies have the potential to seek payment directly from the credit originator’s customer.

One debt free alternative to invoice factoring are technology driven Early Payment Programs. These are generally offered by large corporates to their supplier base to drive EBITDA growth and improve supplier relationships by offering early payment in exchange for a small discount.

As participants in these programs, suppliers stand to gain from the following benefits: l A significant reduction in DSO (cash flow) l On-demand payment whenever approved invoices are available (cash flow) l Reduced cost of borrowing to ensure business operations remain sustainable (prosperity) l Identification of potential growth opportunities through limit increases with accounts being paid down sooner, and a true opportunity for positive collaboration between credit and sales teams (revenue) l Invoice portal visibility, removing the need for additional phone calls and emails to understand when invoices are going to be paid (resourcing). The big macro trend upon which Earlytrade was founded is that you no longer need to be a financial intermediary to shift credit between different tiers in a supply chain. Technology is disrupting traditional financial services by connecting buyers and suppliers allowing credit to flow seamlessly between trading partners.

The adoption of newer alternatives to invoice factoring and traditional payment terms is on the rise. If the numbers stack up, it could be worth a conversation with your key customers to determine whether they have the capacity to offer early payment programs to their suppliers.

*Guy Saxelby Co-Founder and CEO, Earlytrade www.earlytrade.com