Yes, there can be a small cost to accelerating payments on your receivables. But the assurance of having cash on hand makes early payment a more viable option than other funding solutions.
Liquidity is often as essential as profit is to any business.
Choosing to accelerate cash flow can increase profitability by speeding your cash conversion cycle and allowing you to deploy that cash more quickly into additional products and services to sell, earning you more profit.
You may ask yourself, “We’re not earning a lot on these invoices, anyway — why cut into those margins just to be paid early?” The answer is that early payment is the most effective option when your company needs liquidity, even when margins are tight. This is especially true in tough economic times, when other sources of funding are less certain.
Accelerating payment on your invoices can have more of a long-term impact on your company than invoice margins, said Eli Allgood, a director of business development for C2FO.
“Sure, it costs money and you may make less in the moment, but if it unlocks future growth and additional business, it’s really an investment, not a cost,” he said.
Here are seven reasons why early payment through C2FO still helps, even in the case of narrow margins on receivables:
1. It can lead to greater profitability
The accelerated cash flow generated through early payment helps to speed up your cash conversion cycle, which measures the amount of time it takes for your company to convert investments in inventory or services into cash. A long cash conversion cycle means that too much liquidity is tied up in accounts receivable. Shortening this cycle is a good thing, allowing you to put more cash into new products and services, and providing a quicker path to profitability for that expansion.
Early payment on receivables helps to reduce your company’s days sales outstanding (DSO) and the cash conversion cycle. In other words, offering a discount for early payment now can fuel faster sales growth, help to build a healthier balance sheet and potentially lead to greater profitability in the near future.
2. It is part of the cost of capital
The cost of working capital is fungible, or interchangeable. Whether your business borrows or gives a discount to improve cash flow, there’s going to be an associated cost.
The amount of margin given up to receive early payment is a cost, just as drawing on a loan with annual interest is a cost. In fact, offering a discount or APR to be paid early is preferable because it’s not debt and early payment provides the certainty of dollars in your account immediately.
That certainty becomes even more important in times of crisis when banks, reacting to credit risks, may reduce or cancel lines of credit or lower advance rates. Suddenly, a 6% APR on accelerating invoice payments may be preferable to 5% interest on a credit line, given the immediate impact and dependability of early payment.
3. You likely have multiple customers on the C2FO platform
As a leading global provider of working capital, C2FO matches accounts payable and accounts receivable for more than one million companies around the world, representing $10.5 trillion in annual sales. More than 50 million invoices are uploaded to the C2FO platform each day.
That broad network means there is a good chance you have more than one customer using C2FO. If you’re reluctant to discount invoices for one particular customer that offers narrow margins, there likely are other customers and invoices on C2FO that are better opportunities for early payment.
4. You determine the discount or rate
As a C2FO customer, you have control over protecting your company’s margins on invoices.
The C2FO platform’s patented Name Your Rate™ technology enables you to determine discounts on invoices that you select. If your customer approves those discount offers, you can receive payment in as little as 24 hours. For example, if you set an offer rate of 0.10% for accelerated payment, you may not clear all of your invoices at that rate, but you will receive earlier payment at discounts that work for your company.
You also have the option of designating which invoices on C2FO you want to accelerate. This flexibility allows you to take early payment on invoices with larger margins and wait to get paid on less profitable invoices according to terms with your customer.
5. It improves liquidity and metrics
Even if your company has a strong cash position, optimizing early payment will show a greater amount of cash on your balance sheet than by waiting for those receivables to be paid after a reporting period (think in terms of a customer waiting to pay you in January or February, rather than by year-end on Dec. 31).
This extra cash at year-end or quarter-end can improve your company’s leverage ratio, an important metric to banks and investors. Funding through early payment can have similar effects on other metrics like cash conversion cycle, DSO and EBITDA, all without your company taking on any additional debt.
“Many of the suppliers we work with want to improve their financial statements and quarterly or annual financial reports,” Allgood said. “If an organization brings in early payment, they can show a greater amount of cash on their balance sheet than if they waited for those funds to be paid after the reporting period.”
6. It can replace your allotment for late payments
Many companies offer their customers discounts of between 0.15% and 0.40% off on late payments of invoices that are tied up in-process due to disputes, adjustment or other issues.
If your company is willing to take a discount to avoid nonpayment, why not offer discounts or APR rates for early payment that can help reduce late payments and improve DSO from the very start?
7. The cost is competitive with borrowing
And, even if you offer an APR through C2FO that is higher than borrowing from a line of credit, the tangible quality of quickly having cash on hand cannot be matched by borrowing. And unlike borrowing, where advance rates can be only 70-80% of your qualified accounts receivable, when you use C2FO to accelerate payment of your accounts receivable the advance rate is 100%.
The cost of early payment is competitive with credit line rates and it involves less risk for your company, said Justin Rethmeyer, a senior strategic supplier relationship manager at C2FO.
“If you’re borrowing from the bank, you should be willing to pay a little more for early payment because it’s not debt. It’s straight cash that goes right to your balance sheet,” he said.
Having more cash flow, earlier, helps your company improve its cash conversion cycle, meet fixed costs like rent and payroll, or fund an expansion of your business.
The C2FO platform gives you the flexibility needed to select invoices for early payment, determine the rates and build more cash flow while also helping to protect your company’s margins.
Bottom line: the tools provided through C2FO can be a win-win for both your company’s cash flow and profitability.