Market Perspective

How Early Payment Pays Off During a Recession

April 26, 2020
The C2FO Team

A recession can mean credit problems for your customers and a tighter lending market. Fortunately, early payment programs like C2FO can help you take control of cash flow and shield your business from an economic downturn.

The so-called Coronavirus Recession is here. Is your company prepared? 

The best way for a business to survive any economic downturn is by having reliable sources of working capital. In recent weeks, the U.S. government has provided hundreds of billions of dollars for small to mid-sized businesses under the Paycheck Protection Program. But that funding alone will not be enough for every company that has been affected by the COVID-19 pandemic.

In times when cash dries up and banks pull back on lines of credit, an early payment program with your customers can be crucial to generating the cash flow needed to run your business. 

Now is a good time to look into early payment, if you haven’t done so already. For a program like C2FO, generating more cash flow is as simple as logging in and selecting which customer invoices you want to receive early payment on. 

Welcome to the next recession 

Throughout 2019, economic experts and the media speculated whether or not global markets were on the verge of a recession. It turns out they were, but no one predicted that a pandemic would force businesses worldwide to shut down, creating an unprecedented economic crisis with no clear end in sight. 

If you endured the Great Recession of 2007-10, you probably had customers that went out of business. Maybe you experienced a cash crisis or a disruption to your operations because a bank pulled back on your line of credit. 

It doesn’t have to be that way during this recession. Unlike 2007-2010, there are early payment programs today that can enable you to accelerate receivables from customers, maintain a steady cash flow to get through lean times, and become less reliant on the whims of traditional lenders.

C2FO may be your best option, with early payment programs for major brands across retail, transportation, technology, energy and other industries.

“As we face another recession, it seems that businesses should be considering multiple partners to assist with working capital needs. That could include banks and less-traditional fintechs that offer innovative solutions,” said Kerri Thurston, C2FO’s chief financial officer.  

In times of trouble, we all tend to hunker down and stick with the familiar. We want to rely on that financial provider that’s served us for so many years, or to trust that the customer who makes up a sizable chunk of our business will continue to make timely payments.

That seemingly safe approach, however, may be the riskiest thing you could do in a recession.

Why is this a good time to consider an early payment program for your business? Here are four key reasons:

1. Less risk and greater flexibility

An early payment program can be another source of working capital for your company. That’s especially useful during times when cash is hard to come by.

C2FO’s early payment program helps companies reduce financial risk by accelerating receivables at reasonable discounts, ensuring quicker payments. Unlike other alternative forms of financing like invoice factoring, there’s no buying of invoices by a third-party, no locked-in rates, and no fees.

With the C2FO platform, you work directly with your customers, set your own invoice discount rates, and finance the invoices on an as-needed basis. For example, instead of waiting 60 to 90 days on a big-box retailer to pay an invoice, you designate a discount on the invoice for early payment. If that customer agrees to the discount, the invoice amount appears in your bank account within a few days instead of two to three months. The only “fee” you pay on the transaction is the discount that you and retailer agree upon.

This kind of flexible funding is especially crucial during a recession. In an economic environment when borrowing rates are plunging, having a program that offers variable rates based on the federal funds rate or LIBOR can help you avoid paying excessive interest on your invoices.

“Variable rates and the flexibility to use the program as needed are two of the biggest advantages that C2FO offers during uncertain times,” C2FO’s Thurston said.

Early payment can also serve as an alternative to traditional financial partners.

One of the first things that will happen during an economic slowdown is conventional sources of credit will tighten. The capital you use to finance your business may become more difficult, if not impossible, to obtain.

That’s what happened during the last recession, when banks’ balance sheets, capital allocation and lending practices came under scrutiny. A wave of regulations made banks more risk-averse and less likely to lend to growing businesses. Many businesses saw their lines of credit cut or pulled entirely.

In other words, traditional sources of capital dried up. That will likely happen again in the next recession.

“Unless you have an SBA loan, which is guaranteed by the federal government, you’re probably going to have this problem,” said Kevin Ehinger, president of C2FO Capital Finance. “If I’m a CFO or a business owner, I’m concerned about what I’m going to do to get capital.”

Collecting early payments on receivables can be a much-needed extra source of working capital during a recession. It can also shield you from the trickle-down effect of your customers’ credit problems.

“There’s an increased risk of credit loss because someone is going to go bankrupt,” Ehinger said. “When you use C2FO during a recession, you are managing risk. Once you’re paid, you don’t have that exposure to the customer.”

2. Fewer interruptions to your business 

 Kerri Thurston remembers the last recession well.

In 2008, the consumer goods company she worked for experienced a supply chain breakdown due to a supplier’s cash flow problems. As a result, Thurston’s company ran out of a component for a popular product and missed out on sales opportunities.

If the company had used an early payment program like C2FO, the supplier could have accelerated payment on its invoices to avoid the component shortage. Everyone would have been better off during a difficult economic time. 

Thurston believes that a future recession will have a similar impact on companies and their vendors.

“I think the supply chain continuum will be under pressure in a recessionary period and I believe C2FO offers an innovative solution to address many of the forthcoming challenges,” she said.

Even in prosperous times, your company may experience the financial squeeze between waiting 60 or even 90 days on customer payments and meeting the pay terms of your vendors.

That squeeze will intensify during a recession, when customers may impose longer pay terms to protect their own cash positions.

Think about it. If a major customer has to extend their payment terms by another 15 days—at a time when cash is already tight and your line of credit is at risk—that extra amount of time can devastate your ability to do business. Suddenly, managing your supply chain and even meeting payroll could be at risk.

If you and the customer are already transacting through a program like C2FO, you have a channel through which to receive early payment on those invoices. You may have to increase the discount rate you offer on those receivables, but you’ll receive payment early and will have more cash on hand to pay your suppliers, pay your employees, and preserve the business you already have.

3.   An easier way to build capital

A common reaction from many company executives who start using the C2FO platform is, “This is too good to be true.”

That was Jack Leal’s initial response. The CFO for Houston-based Petrochem Field Services couldn’t believe he could set the discount on an invoice, notify his customer and quickly learn if it had been approved, all with just a few mouse clicks on C2FO’s software.

“I was a little nervous the first time we pushed that button,” he said. “Then we saw the emails start flying through and we get notified by our bank that the monies are there the next day, and it was pretty impressive.”  

Compared to other forms of financing, early payment through C2FO is easy. There’s no debt or lengthy approval process, as there is with a traditional line of credit. There’s no confusing paperwork, third-party interference or litany of fees, as with other forms of financing. All you pay for is the discount you offer on customer invoices. And you can use early payment on an as-needed basis.

Advantages of C2FO’s Early Payment:

  •     No fees – you only pay for the invoice discounts you offer
  •     No contracts or long-term commitments
  •     No debt
  •     Easy account set-up and no paperwork
  •     No third party – early payments come directly from your customers
  •     Payment in as little as 24 hours

In the event of a recession, the competitive cost and ease of using C2FO could be your company’s secret weapon for generating the capital you need to survive, and even grow, during an economic crisis. 

4.   Customers want you to use it

 C2FO was built during the aftermath of the last recession—not an ideal time to start and grow a company.

Why was C2FO’s early payment program able to thrive at that time? Because large enterprises saw early payment as a way to pump liquidity into their supply chains, while also generating a return on their invoice payments during a zero-interest-rate environment.

When another recession occurs, you can take comfort in that your customers will put cash into the C2FO program, because there will be few other places to put it.

The 200-plus enterprises that currently use C2FO see it as a way to improve supplier relationships and generate consistent returns on their excess cash. Their decision to install C2FO’s early payment software into their systems also make quick payments available to you at fair, flexible and competitive prices.

Early payment programs like C2FO also make it easier for enterprises to manage their accounts payable.

When Ehinger was treasurer at Indiana-based wholesaler Do it Best Corp. in 2013, the company’s accounts payable department was flooded with calls from suppliers who were desperate to be paid early. C2FO’s early payment platform made it easier for Do it Best to manage that process.

“Before, it would take our people 100 hours a week to verify invoices were approved or handle requests for early payments,” Ehinger said. “C2FO allowed us to offer that experience to many more suppliers while streamlining the process, so it didn’t take as much work and time.”

Do it Best had available cash flow at a time when many companies did not. The wholesaler didn’t need to partner with C2FO on an early payment program in 2013, but company officials saw the advantages early payment could bring to Do it Best, as well as to its suppliers.

Today, hundreds of companies offer C2FO’s early payment program to suppliers because they recognize how all parties benefit.

The bottom line

How long will the Coronavirus Recession last? No one knows for certain. The so-called experts have been wrong many times before.

Still, regardless of what happens in the coming months and years, your company can only benefit from having an extra source of working capital in its back pocket.

How often you use it is up to you.



Want to take control of your cash flow?

Early payment through C2FO can help.

Related Reading