Updated: Oct 7, 2020
Term: Why do B2B Suppliers want to be Banks?
B2B Suppliers have been offering their buyers Terms for goods and services purchased as a standard business practice for decades. It is common for buyers to expect suppliers to offer this in order to do business together. Term takes many different forms but the most common are 30/60/90 days. You will sometimes see a shorter term of Net 10 for a 1% or 2% Discount. This is sometimes offered to increase cash flow and reduce exposure a business gives by offering longer term. However, it is a massive tell about the supplier as it tells what the cost tolerance for collecting cash faster actually is. In the end it is all a bit of a game with every business trying to use someone else’s money for as long as they can for as little as they can to maximize their return. Term has in many cases become a liability that businesses are paralyzed to eliminate. Imagine if suppliers could just supply goods and get paid easily………. (lol).
Depending on who you talk to there are industry norms where 30 days is the most standard term, but more and more buyers are pushing the envelope. Take Kroger as an example, who in 2018 switched to a 90 Day Payment policy, unless of course the supplier gives Kroger a generous discount to pay within 10 days. Certainly, the best of both worlds for Kroger, I am not sure what is in it for the supplier but added cost, less margin, and often a strained relationship. There are other examples of large buyers taking advantage of Terms to the point of putting smaller suppliers into Bankruptcy.
When you talk to this 30-day supplier group, they are very clear on the Term they offer. It is quite humorous because these same businesses always have the best payers, no bad debt and all their buyers pay exactly on time. This is what they want you to hear. It is therefore strange when they tell you that their Days Sales Outstanding (DSO) is 45 days. Wait? What? Didn’t you just tell me that your customers paid on time.? Along with the 30-day term this 15-day differential can go unchecked an unquantified by many businesses and regrettably eats away at profits as an invisible enemy that has settled in as the norm.
Let us examine what happens at most businesses when the 30-Day Term is not met. Once goods or services are purchased, an Invoice is created and sent to a buyer. This is not a free process. There is cost to generate an invoice, items like labor, systems, printing, paper, postage, credit risking, bad debt provision and bank fees are a few of the seldom tracked costs for collections. Published estimates have these collection costs as high as 1% for the process. And once the invoice goes unpaid by day 32 or 33, the systems do it all over again repeating the process as a reminder to the buyer to pay. Adding further expense to this collections process is when humans get involved to track down payments. For some playing this game, can get quite expensive.
Furthermore, financing the receivable with cash or a line of credit is typical in business today. Cash and borrowings used to finance this overhead do not deliver the same return for the business. As a result of combining operations and financing costs businesses could see collection costs, upwards of 2.5% on Term. That is a tough number to get Finance types to agree to.
So why are so many suppliers stuck in this quagmire? Part of it is tradition. Suppliers have always done it this way. Part of it is they have created expectations with their buyers, that Term is part of the buying process and buyers now expect term as a condition of doing business with a supplier. And finally, businesses embrace the Term process because they do not always track the total cost of collection. If they did, they might see how inefficient they are in this process. Seldom have I met a business that did not think they were good at collections. Businesses work very hard to collect cash faster, but most are in denial as to what it cost to do this work. Imagine a low-cost alternative to Term that could improve DSO, significantly, perhaps even eliminate it. Imagine if a business could eliminate 10 Day Term and 2 % discounts and collect 100% of the Invoice. You do not have to imagine too hard; it is already available and simpler that you would think. The issue is the Credit Networks are selling B2B Suppliers with the wrong strategy. Stay tuned to Guide2Interchange.com as we tackle this issue.
Roger McNamara Bio:
Roger is a 25+-year veteran of the Payments Industry, most recently as the Director of Business Development with American Express in the US. He has worked on the largest Acquisition targets for acceptance across multiple Industries and across the globe that include : Airlines, Communications, Technology, Cruise Lines, Entertainment, Fractional Jet, Freight, Government, Healthcare, Insurance, Oil & Gas, Residential Rent, Restaurants, QSR’s, Retail, Services, Supermarkets, Travel, Vehicle Sales, B2B and Wholesale. Over that time, he has sold more than $200 Billion worth of Card processing and became an expert in Bankcard Interchange and Discount Rates, how they are calculated and what merchant pay to accept Credit and how this is dramatically different from what they believe they pay. He is an expert in Merchant Statement analysis and payment processing and the rules and regulations associated with payments and the associations. Roger has also developed the insight for Merchant Services Salesforces and salesforces in general to be able to better position their products and gain share particularly in B2B. Let him show you how you can too. He can be reached at Guide2Interchange@gmail.com