Why do suppliers have to wait for their money?

It might seem like a strange question in a world, where the default is that suppliers are paid on average 52 days after they send an invoice. When we first started asking our customers, advisors and others about this, we just got strange looks, were we crazy? We were told that this is the natural order, this is how it always has been, and customers need to conserve cash flow and so on. Luckily we are a startup and asking as many questions as we like is a privilege.

In addition, we didn’t feel we had received any decent responses. Actually we think it’s pretty crazy that suppliers don’t get their money right away. With the current system everyone loses.

The suppliers who don’t get their funds have to go to the bank for expensive credit or even worse go out of business because they can’t pay their suppliers.

The buyer then receives expensive goods and services as the suppliers have to factor in the cost of borrowing money to manage their cash flow.

The problem is of course on an individual basis. It makes a lot of sense for large companies to pressure their suppliers for longer payment days, this conserves cash and as we know, cash is king, especially in a recession.

The downside is that by forcing their suppliers to borrow money (by delaying payment), large companies are actually storing credit at the most expensive point in the whole supply chain. Where the large buyer typically has a great credit rating and can borrow money at low cost, the smaller suppliers typically pay a premium for credit. The premium which supplier’s pay to a banks is essentially destroyed value (unless you are a bank).

Asking a stupid question and not liking the answers is a good way to start thinking about how something could and should work in a better way.

That’s exactly what we did with Tradeshift Instant Payments.

First we looked at existing solutions trying to solve this problem. For example factoring or auctioning of invoices. While these solutions offered small suppliers the opportunity to get their money faster, they are both expensive and cumbersome.

Suppliers have to send their invoices to be processed by a third party who then typically pay quite an expensive fee for getting their money faster. We wanted something that was easy to use and cheaper than existing finance channels.

The solution is simple.

We have much better data on each transaction completed electronically through the Tradeshift business cloud. We know when the customer receives the invoice, we know when the customer accepts the invoice and we know that in 99 out of a 100 cases that the invoice will be paid on time.

This allowed us to build a model where those suppliers who wanted instant payments could share data to prove that the invoice is in fact accepted. In essence, we move from a per company credit view to a per transaction credit view allowing us to make a better risk assessment.

Tradeshift Instant Payment helps suppliers get out of a credit squeeze whilst allowing buyers to maintain their normal payment terms.