5 Ways That Early Invoice Payment Makes Your Enterprise Stronger
October 19, 2022 |
The C2FO Team
Early payment can be a win-win for buyers and suppliers.
In an unsettled economy, cash is king. There are several reasons why companies retain a healthy supply of cash on hand — including the ability to simply stay in business — but don’t forget that early invoice payment can generate substantial benefits for your organization, too.
That’s especially true for enterprises that rely on their supply chains to function. For some, that reliance on their supply chain led to the most important (and most painful) lesson of the past few years: Supply chains aren’t magic. Put them under enough pressure, and they’ll break down — unless their enterprise customers offer support.
For companies that want to strengthen their supply chain, early invoice payment is one of the most effective methods for doing so. But that’s not the only advantage it offers. Here are five ways that early payment can ultimately make your business stronger, too.
1. Strengthen your supply chain
Cash flow usually isn’t a significant problem for larger enterprises, but it can be a life-or-death threat for many small and mid-size firms. They need ready access to cash so they can buy inventory, meet payroll and pay for investments in their operations.
So, when a customer decides to pay early on its invoices, that helps the supplier in several ways.
For starters, there’s an infusion of cash that can be used to keep the business up and running, especially during times of challenge and uncertainty.
This also reduces the supplier’s need to borrow from a bank. As a result, the supplier saves money because it doesn’t have to pay interest on a loan or line of credit.
There’s less risk to the business. The early payment is money that your supplier has already earned. Unlike a loan, there’s no chance of getting behind on payments and having to forfeit collateral.
Early payment also helps fund the supplier’s growth. Having even a little more cash can increase the supplier’s ability to tackle bigger orders and invest in equipment that boosts its production capacity. If you’re a growing business, you want suppliers that can grow, too.
Ultimately, early invoice payment helps increase the odds of a supplier’s survival, so it will still be around next quarter or next year to continue serving your business.
2. Save money by earning an early invoice payment discount
Many suppliers give discounts to customers that pay their invoices early, even if it’s a basic offer of 2/10 net 30.
One word of warning: Many suppliers now assume customers will take the 2% discount, so they build that discount into their cost. You may be able to generate a better return if you prioritize early payment to suppliers that offer some form of dynamic discounting.
With dynamic discounting, the size of your discount can change. Generally speaking, the earlier you pay, the more you save — your discount on Day 1 will be bigger than what you would receive on Day 10.
With 2/10 net 30 and other static (or unchanging) discounts, there’s no incentive to pay as early as possible if your discount on Day 1 is exactly the same as it would be on Day 10.
Dynamic discounting can be a way for suppliers to counter inflation. If a supplier gets paid 30 days early, it can quickly reinvest that money into new inventory or materials before its prices rise again. By doing this consistently, a supplier can help protect its margins.
Some suppliers are too small to offer dynamic discounting on their own. That’s why C2FO works with some of the world’s largest enterprises to offer dynamic discounting to their customers, via our secure platform.
3. Build stronger ties with suppliers
Paying early can put you in a better light with suppliers, creating more opportunities for closer collaboration and ensuring a positive working relationship.
Having a positive relationship with them can pay off in several ways, whether it’s getting your emails returned faster or being open to partnering on new initiatives and products.
Early payment is a clear sign that you value that supplier and are invested in their success. Most vendors will recognize that and go above and beyond for you.
4. Incentivize desired behaviors and achieve other ESG goals
You can use early invoice payment as a reward for suppliers that adopt best practices — for example, being “virtuous” around environmental, social, governance (ESG) and sustainability.
Smart businesses will offer incentives to reward suppliers that improve their ESG practices — after all, in many industries, 80% of a company’s environmental impact is from its supply chain. That in turn can improve the buyer’s ESG score.
Other companies may want to offer extra support to diverse- and women-owned businesses. They could offer better payment terms to those companies as a way to boost their cash flow and working capital, since access to capital is poor for many of these groups.
Improving capital access for diverse entrepreneurs is an important part of C2FO’s mission, and we’ve developed special programs to assist them. In fact, McKinsey & Co. highlighted our platform as one way that retailers can support diverse-owned businesses.
5. Build your business credit score
Paying invoices early can also improve your company’s business credit score.
To build its PAYDEX business credit scores, for example, Dun & Bradstreet will look at when a company paid its invoices, using data provided by that company’s suppliers.
Pay all your bills according to the terms? That’s good enough for a PAYDEX score of 80 on a 0-to-100 scale. If you want something higher than that, you’ll need to consistently pay early.
Your score can affect your financing terms, insurance premiums or even whether another company wants to do business with you.
The bottom line
Early invoice payment is a powerful tool for supporting your suppliers, but it comes with several benefits for your organization, too, including early payment discounts, stronger relationships with suppliers, a better business credit score and help meeting strategic goals around ESG and diversity.
Interested in offering an early payment program to your suppliers? Discover how C2FO can help.