Early payment is an effective way to provide suppliers access to low-cost capital. However, the buyer’s commitment and involvement are crucial to the success of any early payment program.
At C2FO, we often talk about how the speed, simplicity and flexibility of our early payment solution leads to stronger participation rates among suppliers than do most supply chain finance (SCF) programs.
Early payment engages several times as many suppliers as do SCF programs. Suppliers that participate on the C2FO platform appreciate the fact that they can select which customer invoices to accelerate payment on, at times when they need more liquidity and at rates that they determine. In other words, early payment through C2FO gives them greater control over their cash flow than other forms of alternative financing.
However, it’s the customer, or buyer, who sets up an early payment program, not their suppliers. And the success of these programs relies heavily on the buyer’s commitment and preparation in directing more liquidity to their suppliers.
Below are the six key elements every buyer should have to ensure a successful early payment program:
1. Having enough cash to fund the program
This one sounds like a no-brainer, but it’s also the most important element. Before launching an early payment offering, you need to have sufficient liquidity to ensure it is an effective financial instrument for both you and your suppliers.
An underfunded early payment program can mean fewer approved invoices, higher rates and can also put a damper on your supplier relationships. Pushing your suppliers to offer sizable discounts in exchange for much-needed cash flow may seem more like a penalty than a benefit. An even worse scenario is if you have to close your early payment program, even temporarily, due to a need to preserve cash. That can damage the trust you’ve worked so hard to build in your supply chain.
If you want to help your suppliers accelerate payment on their invoices, but you don’t always have the liquidity to consistently fund the program, a better option may be Dynamic Supplier Finance (DSF) a form of supplier finance that enables you to toggle between your company’s balance sheet and C2FO’s funding network to pay your suppliers early.
2. ROI expectations that are reasonable
One of the many advantages of early payment through C2FO is that you, the buyer, can use the program to improve your own cash management, as well as key metrics like days payable outstanding (DPO), EBITDA, gross margins and returns on cash. In many cases, the financial benefits of early payment can be significantly higher than projected, as this case study with Albertsons Companies illustrates.
However, your expectations for an ROI from an early payment program must be balanced against competitive rates that will encourage supplier participation. Some patience is required, as it may take a few months before the program pays for itself as more suppliers register and choose to accelerate payment on their invoices.
Going into early payment with a clear idea of what successful supplier adoption looks like, in terms of the number of suppliers who will use the program and the volume of receivables they will choose to accelerate, is also key to realistic expectations for your early payment program.
3. A dependable process for early payment
Suppliers trust early payment through the C2FO platform because it is quick and easy to use. After choosing which invoices to accelerate and at what rates, suppliers can receive approval and payment in as little as 24 hours.
This doesn’t happen by magic, however. To make the program as seamless and quick as possible, you must collaborate with C2FO on implementing a process for timely invoice approvals. Automation through the C2FO platform does most of the heavy lifting in processing invoices and alerting suppliers when their offers for early payment have been approved, but we’ll need your help in setting benchmarks at the start of the program to ensure that early payment is accelerated by enough days to make it enticing and valuable to the supplier.
4. A mission to benefit all suppliers
One advantage early payment has over other SCF is that it’s designed to help every business in your supply chain, from the smallest to the largest vendors. There’s no paperwork, no documentation or exclusionary onboarding requirements that typically limit the number of suppliers that participate in an SCF program.
The ease and simplicity of early payment through C2FO encourages all suppliers to participate, which can be especially critical in times of economic uncertainty when small to mid-sized businesses are particularly vulnerable. Because C2FO’s early payment takes a “big tent” approach to all suppliers, empowering them to select invoices to accelerate at rates that work for them, we’ve received a few honors from supplier finance groups that recognize the sustainability benefits of early payment for companies of all sizes.
5. The right contacts at each of your suppliers
This one is simple, but often overlooked. After launching your early payment program, C2FO will reach out to each supplier with additional information and an invitation to create their account. If we do not have the right contact person at each of the suppliers (ie: financial decision-makers like a company owner, CFO or treasurer) this can become a slow process that hampers suppliers’ adoption of early payment.
Having a strong list of the right contacts at each of your vendors can speed up participation and ensure your suppliers have all the information needed to make a decision about early payment.
6. A willingness to work with C2FO as a partner, not as a banker
As the world’s largest market for working capital, C2FO offers several solutions beyond early payment, all of them designed to build more financial strength for your company, your suppliers and your customers.
As a C2FO client, you can utilize our cloud-based platform to manage your payables and receivables, accelerating or extending them, on-demand, at times that optimize capital for every business your organization touches. And it can all be done from a single, secure online location.
The speed, flexibility and innovation of C2FO creates more funding options for your company than a bank line of credit. The businesses we work with are more than customers — they’re partners in our mission to generate more working capital that works for everyone.
At C2FO, we firmly believe that early payment is the most effective way to free up more cash flow, quickly, for suppliers of all sizes.
However, the success of early payment also depends on the commitment and vision of the enterprise that offers the program. As a buyer, you’ll need to make sure you have the liquidity, processes and relationships in place to make early payment worthwhile and easy-to-use for your suppliers. You will also need to articulate your own goals for a realistic ROI from the program.
In short, early payment can be a valuable, versatile tool for your suppliers. It just takes a little preparation on your part to make it work.