Why pay suppliers quickly?
Is taking credit from suppliers good for a buyer's business? What's not to like?
If suppliers will give you credit (for free!), surely you should take it?
Read on for 3 more minutes to see why the conventional wisdom might be wrong.

Free credit - hard to turn down
Many suppliers have grown used to the fact that buyers should be given credit. Ship the goods, get paid later.
These standard terms of trade are commonplace, with some industries pushing payment terms out to 90, 120, even 180 days or more.
On the face of it, this sounds like it should be great for the buyer.
Suppliers do not charge interest like a bank.
They can be quite unsophisticated on credit.
They want the purchase order - they agree to the terms that the buyer sets.
And the buyer gets "trade credit" which boosts their operating cash flow. Buyers are getting goods on credit and selling them for cash. The more they buy, the more cash they generate.
But is supplier credit actually good for business?
Here's the point. It is a zero-sum game.
Suppliers are not fools. The buyer pays for all the services provided in the price of the goods supplied, or the supplier goes out of business. And that includes the cost of any credit period that the supplier provides.
To understand if this is a benefit for the buyer, we need to compare
the supplier cost of providing credit versus
the buyer cost of accelerating payment.
What are the supplier costs of providing credit?
Suppliers have a number of costs when they provide credit to buyers:
Credit insurance, to cover the risk of buyer default
Non-payment risk - put simply, will the buyer actually pay?
Borrowing costs - funding the time period from shipment to payment
The buyer may be a long way away and may even be in a different country. This can make it difficult to enforce any claim that the supplier might have, meaning that the buyer payment effectively becomes "voluntary" in the eyes of the supplier's own financiers - and the outstanding buyer invoice then gets ignored in any borrowing base calculation.
This can be true even if the buyer is undoubtedly in good standing and even if the buyer is covered by credit insurance.
This, in turn, leads to a collateral gap for the supplier that limits its ability to fund its own business efficiently. Providing credit to the buyer knocks on into the regular cost of financing the supplier's business - leading, in turn, to an overall increase in funding costs for the whole of the supplier's business.
Opposite to the buyer, the more the supplier ships on credit, the more working capital support it needs from its financiers and the bigger the collateral gap can become.
If the supplier is a small company, this can be very problematic - and this is a major contributor to the famous "trade finance gap" identified by the ADB - causing a significant competitive barrier for smaller companies, particularly in emerging markets. These are companies for whom providing credit to buyers is difficult, damaging and limiting their prospects.
What are the buyer costs of accelerating payment?
Paying suppliers quickly has costs for a buyer.
There is an interest cost for the buyer - or, at least, a loss of interest income on cash in the bank that the buyer would no longer have
Buyers also face two optical costs:
Operating cash flows decline, and investors like businesses that are "cash generative", so this can impact company valuation
Visible leverage increases (ie: the amount of financial debt) that the business has will be higher because trade credit provided by suppliers is lower and does not count as financial debt
If the buyer has limited access to credit itself, then taking credit from suppliers can, undoubtedly, be an important move - even a necessary step to continue the business operation.
But many (most) buyers have a choice - they have sufficient credit standing to be able to get cash to suppliers upfront. The question is whether this makes sense.
It usually makes sense to pay suppliers quickly
If the buyer has access to cash or to credit sufficient to enable accelerated payments to suppliers, then it is normally beneficial to use this capability and get payments to suppliers as quickly as possible.
This is not just about a pure economic cost - comparing the suppliers' cost of money to the buyers's cost of money. This is a factor, but the equation is more complicated.
Buyers that take credit from suppliers are often creating vulnerabilities across their supply chain, and making it difficult for smaller suppliers to service them resiliently.
But how can the buyer benefit?
Supply chain finance ("SCF") has often been seen as the solution.
On the face of it, SCF should neatly solve the issue:
Buyers can pay with delay
Suppliers get cash as they ship
The cost of the program is related to the buyer's credit
SCF programs neatly avoid the optical costs of paying suppliers quickly, whilst providing cash to suppliers at a cost linked to the buyer's credit.
But SCF is not really the answer
Supply chain finance programs do not cancel out the collateral gap for suppliers because the "early" payments in the program are not very early.
This is because buyers usually cannot approve invoices until after delivery of goods, so suppliers still have to hand over goods before receiving cash. So that means that suppliers are still buying credit insurance and waiting for payment.
Whilst there is a benefit that suppliers are not waiting quite so long to be paid - there is still a material collateral gap, often 10, 20, 30, even 40+ days.
Cash against data - remove the collateral gap
The new generation of supply chain finance platforms (led by PrimaTrade) enables payments to be made to suppliers as they ship.
The technology is called "cash against data". Suppliers provide data about what they are shipping and, with an appropriate risk management approach, buyers can use this data to approve invoices instantly - so that cash can immediately flow.
Cash against data closes the collateral gap
Moreover, platforms based on "cash against data" can scale down to smaller buyers - principally because programs can go live without an initial IT project.
For more information, see the following blogs:
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