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Part 1: What kind of suppliers take early payment discounts?

Suppliers and customers have been engaged in early payment discounts on outstanding invoices for as long as there’s been commerce. The typical driver on the supplier side is they sometimes want to get paid early (OK, suppliers always want to get paid early). Reciprocally, customers always want to pay a little less. Whether the transaction is consummated usually boils down to the percentage of discount being considered. That discount can usually range from as little as 1-2% or more, depending on how early the invoice is paid as well as the payment mechanism being used.

Customers interested in early payment are usually calculating the savings they’ll realize. They see that realized money as additional revenue that would not be available had they not taken advantage of the early payment option. If that customer borrows the same amount from a bank of what’s been paid early – at a significantly reduce APR during those few days compared to the rate it sees by paying early – it will always make money on the transaction and continually generate more cash for their business.

Suppliers, on the other hand, are calculating the cost of not realizing that additional revenue and whether it’s competitive with any other type of loan they might receive. Continually receiving a 2% discount on payments throughout the year could equate to that supplier taking out a loan to cover operational expenses with an annual interest rate of 24%. Most suppliers simply wouldn’t do that, so they are likely open to early payment on certain invoices at certain times of the year for a certain percentage.

44731179_mlWhat types of suppliers take advantage of early payment discounts?

The reasons why suppliers take early payment discounts vary. Other than simply wanting their money sooner, suppliers may be interested in improving their overall cash flow, increasing working capital to fund a specific area of the business or getting their money sooner from a financially unstable customer – just to name a few. With that in mind, we can take a look at early payment discounts in relation to suppliers using 3 criteria and segmented by annual revenue, as taken from the 2015 Perceptions Study:

  • Whether early payment is to their business
  • Whether they are open to the idea of receiving it directly from customers or from 3rd-party providers
  • Whether they actually take early payment, directly from customers or from 3rd-party providers

Suppliers who indicated that early payment for a discount is important to their business

Based on the data from the 2015 Perceptions Study, 35% of respondents indicated that getting paid early in exchange for a discount was important to their business. If we look deeper into how prevalent that importance is based on a supplier’s annual revenue, we can see the following:

Suppliers with revenue less than $100 million

  • Getting paid early for a discount is important: 24.1%

Suppliers with revenue between $100 million and $1 billion

  • Getting paid early for a discount is important: 40.0%

Suppliers with revenue over $1 billion

  • Getting paid early for a discount is important: 52.7%

What we now see is that the greater the revenue, the more important early payment becomes. This could be due to several factors, including the more revenue suppliers generate, the more discipline they have around managing their financials; the greater the revenue, the more areas they have to apply the early cash; or the greater the revenue, the larger the invoices resulting in a greater desire to see that much cash sooner.

More than half of supplier organizations making over $1 billion in revenue indicated that getting paid early was important. Does this mean that half of all supplier organizations with revenue over $1 billion take early payment on every invoice? No, it does not. What it may mean is more than half of those higher-revenue suppliers see early payment a strategic tool they use at their discretion during a given period for certain invoice amounts in order to address specific cash flow and working capital needs. In other words, more of them pick and choose when to take early payment.

Suppliers open to getting paid early, either directly from customers or from a 3rd-party provider

Now that we’ve seen how important early payment is to suppliers based on their annual revenue, let’s look at which suppliers are open to taking early payment – either directly from their customer or from a 3rd-party provider.

Suppliers with revenue less than $100 million

  • Open to early payment from customers: 25.0%
  • Open to early payment from 3rd parties: 14.7%

Suppliers with revenue between $100 million and $1 billion

  • Open to early payment from customers: 26.7%
  • Open to early payment from 3rd parties: 22.2%

Suppliers with revenue over $1 billion

  • Open to early payment from customers: 38.2%
  • Open to early payment from 3rd parties: 32.7%

While “early payment is important” and “open to receiving early payment” may sound very similar, they are actually not. For those respondents indicating early payment as important, they may have a number of early payment options at their disposal. For suppliers who expressed openness to early payment, we’re focusing on two general options here; directly from the customer or from a 3rd-party provider. Statistically, the percentage of suppliers in both general groups can be close and we do see incremental increases at roughly the same rate based on how their revenue is segmented. But, if we dig deeper once more, we can begin to see more of a difference.

Suppliers actually taking an early payment discount, either directly from customers or from a 3rd-party provider

It’s one thing to indicate that taking early payment in exchange for a discount has some importance to your organization. It’s also another thing to indicate that you are open – or not necessarily opposed – to receiving early payment for a discount. But, when we get down to who actually takes advantage of early payment, whether from customers or from 3rd parties, we see the following:

Suppliers with revenue less than $100 million

  • Actually taking early payment from customers: 30.2%
  • Actually taking early payment from 3rd parties: 6.9%

Suppliers with revenue between $100 million and $1 billion

  • Actually taking early payment from customers: 26.7%
  • Actually taking early payment from 3rd parties: 8.9%

Suppliers with revenue over $1 billion

  • Actually taking early payment from customers: 45.5%
  • Actually taking early payment from 3rd parties: 3.6%

A conclusion from this third view is that suppliers who are open to receiving early payment from customers compared to those who actually receive early payment from customers is fairly close, there is a significant gap between those who are open to and those who actually take early payment from 3rd-party providers. Also, the greater the revenue generated by the supplier organization, the less inclined they are to receive early payment from a 3rd-party provider – although a greater percentage are open to the idea.

In general, larger supplier organizations are more inclined to be open to the idea and willing to actually take advantage of early payment discounts compared to lower-revenue suppliers. What about your organization?

In part 2 of this installment, we’ll take a look at the same question but cross analyze by industry as well as annual invoice submission volume.

Download your copy of the 2015 Perceptions Study.

Ernie Martin is founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.

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