Whether you work for an organization that already accepts early payment on invoices submitted to customers or is considering accepting early payment, these are the most common questions asked by those receiving the payment.
- Why do suppliers take advantage of early payment?
Supplier organizations might take advantage of early payment on select, or all, invoices to improve cash flow and working capital. Waiting 30, 60, 90 days or more can potentially have severe consequences on suppliers, especially when they’ve already completed delivery of their order(s) or service, and have payroll and other financial obligations. Getting paid early, minus a small discount, helps supplier organizations address cash flow concerns and improve working capital.
- Why do customers take advantage of early payment?
A customer receiving invoices from suppliers may take advantage of early payment for any number of reasons. Primarily, a customer may have excess cash on hand that could be applied to outstanding invoices. By doing this, the customer “invests in” or funds an early payment initiative for the purpose of generating additional revenue at the end of the month, quarter, or year as a result of paying the invoice minus the discount for paying early. Many customers view this as an additional revenue stream and a way to generate “free” money where there is no associated cost of goods for that additional revenue. Customers who have no significant cash on hand to fund early payment may still partner with a financial institution or other provider to facilitate early payment. This allows them to hold onto their cash longer and generate revenue per the difference paid to the supplier early and what’s paid to the funder at term.
- What early payment options are easiest for suppliers to implement?
Perhaps the easiest early payment option to implement is the prompt payment discount. Using this method allows the supplier to simply write payment terms into the invoice and enable a discount with no complexity or technology. The challenge with incorporating this method is the chance that customers may take advantage of the discount but still pay to term. Factoring may also be easy for the supplier to implement, as the relationship is only between the factor and the supplier. Other methods of early payment, though facilitated by customers or third-party providers, still give the supplier choices as to which invoices will be paid early and which ones will be paid to term.
- Does it matter what the funding mechanism is for suppliers when it comes to Dynamic Discounting or Supply Chain Financing?
Not particularly. The supplier is still paid early and with the involvement of their customer in some capacity. For Dynamic Discounting, the funding is usually done by the customer, while Supply Chain Financing is typically funded by a third-party entity such as a bank or another provider. The discount rate could be identical; the money remains the same, and there is no issue of whether the customer will satisfy an outstanding invoice from the supplier’s perspective once early payment is made.
- Is there one method of accepting early payment that is better than others for suppliers?
Because the answer is very subjective, it depends on the individual goals of each supplier. If the supplier wishes to take early payment but not involve the customer at all, they may choose to use a factor or some form of third-party Supply Chain Finance solution where the customer is not involved. If the supplier is not opposed to involving the customer, they may choose the customer’s Supply Chain Finance or Dynamic Discounting solution. The supplier might also choose to add a prompt payment option as part of their payment terms and simply leave it up to the customer.
Download the free eBook for a comprehensive overview of early invoice payment
Get a comprehensive overview on early payment and the answers to suppliers’ most frequently asked questions by downloading the free eBook: The Definitive Guide – Early Invoice Payment: The supplier’s guide to understanding early invoice payment options and how to leverage it for improved cash flow.
You can download the free eBook here.