Data Key to Supplier-Driven Payment Terms, Working Capital Control
In addition to cementing her place as the Queen of Soul, Aretha Franklin was pretty savvy when playing the payments game.
Aretha got paid at least some of her performance fees in cash, upfront and in her handbag … or she didn’t step up to the microphone. The rest could be paid, down the line, via check.
As Rob Rosenblatt, CEO of alternative financing FinTech Behalf, recounted to Karen Webster, the clubs and venues obliged, because Aretha had what they needed — the ability to sell tickets, of course. That, in itself, is a sign of a supplier’s power to dictate terms.
Turns out more traditional suppliers, the manufacturers and distributors, in navigating the ebbs and flows of B2B commerce, could learn a thing or two from the diva.
in a recent episode of the monthlong, continuing PYMNTS/ Visa B2B payments series that seeks to reimagine business payments in the digital economy, Rosenblatt said in a world where suppliers have more leverage, they could conceivably get paid more — upfront — in payment methods of their choosing.
It may be conventional wisdom to assume that buyers hold all the power in B2B, but as Rosenblatt maintained, suppliers have at least some levers in place to accelerate payment terms. In the meantime, they can reduce their DSOs to help improve working capital and cash flow, as ecosystems connecting all parts of the supply chain (including the consumer) take shape. The urgency is there as the inefficiencies of supply chains stand out in stark relief amid the pandemic, as container ships idle outside ports.
At a high level, he said, platforms give suppliers that kind of leverage, with a consistent data feed between the two sides of those flows — accounts receivables and payables — that enable terms to be set in ways that benefit all stakeholders.
Concept is Decades Old
The model tied to those platforms is nothing new. Rosenblatt described a platform with roots stretching back three decades that connected grocers to their suppliers and manufacturers, and the consumer too, in a bid to offer up relevant coupons and loyalty offers in-store.
“It was clunky,” he noted — perhaps no surprise, given the relatively primitive technology that existed back then. But the overarching theme remains the same: Data rule the day, and the science and tech that exists in consumer payments and loyalty now can find its way into various supply chains.
The tech obstacles that stymied that information flow don’t exist anymore, said Rosenblatt. The digital age has made distribution relationships more direct, and suppliers and buyers can tailor their interactions at an individual level.
Said Rosenblatt: “The levers are all there,” for suppliers to pull: “From early delivery to exclusive products, to preferential product.” To get to that level of exclusivity — which buyers want and sometimes need as they shore up their own inventory — pricing is key and discounting is key, he said.
The suppliers? Well, in a more perfect world, they can dictate the terms of whatever boosts their own returns on investment, said Rosenblatt, whether it’s a matter of pricing or of clearing out old inventory. The buyers want to fill up their brick-and-mortar — or virtual — shelves, in order to be able to satisfy anticipated consumer demand.
Across industries, buyers are refashioning their supply chains, learning not to be too reliant on any one “chain,” or set of suppliers, and in that case, the balance of power is shifting a bit to the vendors and producers and distributors who prove themselves to be critical in establishing new (and even redundant) paths to getting goods on shelves.
Buyers can benefit, he added, by diversifying their supplier bases, letting smaller vendors come on board and in turn fine-tuning their own purchasing behavior and in protecting the financial health of those suppliers.
A shift in buyers’ behavior, he said, would require a values shift, which he said is taking place in corporate America.
“It’s important to care about the supplier and to help the supplier remain a vibrant supplier and member of the community … the interests are not only going to be purely economic,” he said.
Shifting Away from the Check
For now, at least, while it’s aspirational for suppliers to get paid on demand, getting paid on time seems like a more urgent goal than ever.
More than $1 trillion is locked up in what might be termed a receivables gap for one type of payment to small and medium-sized businesses (SMBs) — those ad hoc payments that account for roughly 38 percent of their annual sales, where 30% are late — beyond agreed upon terms, and a staggering 60 percentage of those receivables are late, noted Webster, often by more than a month.
More than ever there’s the need for a supplier-built cash cushion, said Rosenblatt, tied to digital financing conduits.
“There is a certain ‘cost of capital’ that suppliers/sellers will be willing to pay in exchange for the insurance that they can meet payroll and pay the rent. That need is getting more pronounced,” he said. To get a sense of just how much suppliers are willing to pay, consider the fact that the average discount off an invoice to get paid within terms stands at nearly 5%.
The myriad financing out there, the fragmented market that exists as scores of providers crowd the space, means that the cost of capital is too high.
It’s an imperfect and friction-filled arena, the financing space. Quoting Oscar Wilde, Webster recounted that “experience is the name that we give our mistakes,” and to put it kindly, lender/supplier/financing interactions are rife with experience (only a bit tongue in cheek, Rosenblatt posited that B2B is a road paved with many carcasses).
Many lenders misjudged the financial health or ability to repay, in an environment where giving way money is relatively easy, but in rocky economic climates getting it back is hard.
He told Webster it’s a cardinal rule to always believe the math — and to use common sense when lending.
“You can never have enough data,” he said, adding that lending is “a game of good, bad odds when you’re in the business of providing financing. And you must always, always look at data that might have seemed irrelevant,” once upon a time. That would help prevent pulling back too much — in other words, saying no to supply chain financing — simply due to a lack of visibility.
Looking ahead, Ideally, said Rosenblatt, there should be a “slider” function built within financing programs that lets buyers and suppliers align on the terms and discounts and payment period that work … on a case-by-case basis. A million different transactions could conceivably have a million different sets of terms, aided by a robust steam of data points, analytical technology and platforms.
“In theory, there should be a financing vehicle for every single transaction out there,” he told Webster.