Supply Chain Finance

Pay early, earn more

“Pay Late, Collect Early” is a business mantra that most businesses have been taught to follow. But this strategy can also come at a cost. Delayed payments to vendors could mean delayed supplies because many smaller vendors would need the cash to keep their machines going. This could in turn lead to missed sales due to delayed input supplies.  Not just that, suppliers could adjust anticipated delays into their pricing and service levels.  Since these costs are not easily ‘visible’, companies tend to overlook and ignore them.

However, companies who are flush with funds do tend to offer early payments to suppliers in exchange for an appropriate discount, which could vary depending on how early the payments have been made. That way the company earns more than what it would have by keeping its funds idle. Say, the supplier raised an invoice of Rs 100000/- and offers a 1% discount for immediate payment. That would typically be more remunerative than deploying the money elsewhere. When funds are not predictably available, companies could get a supplementary line of credit from their banks for at a rate lower than the discount earned by making the early payment.

Sounds simple. But the truth is that despite the benefits, most companies are unable to sustain early payment programs. There are several reasons for this .

First, erratic cashflows could mean that early payments are not offered consistently, especially if the Buyer’s bank is unable to extend further lines of credit. Sometimes companies are not fully committed to the program, prioritizing other uses for funds available. Without this predictability, suppliers may lose interest in offering discounts.  

Second, suppliers may not always choose to receive early payments, and this could lead to the Buyer’s treasury losing interest – since the earmarked funds could have been better utilized.

Third, the real impact of a program is felt when a large number of suppliers are covered. But this requires close monitoring, which means investment in IT infrastructure and people. The additional costs could defeat the purpose of the process. Even when banks are willing to take over the Buyer’s payables, they may have complex rules regarding payouts to non-clients, and this would disqualify smaller suppliers from joining the program. For the rest,  the process and paperwork of disbursement can be equally cumbersome and time consuming.

This combination of inconsistent usage,  higher onboarding costs, low coverage, and low utilization, results in discounting programs being non-starters.

Vayana offers Early Payment Programs that are specifically designed to address these issues. Our banking domain expertise, technological finesse, and customer insight enable us to  reach, assess, onboard, and service  even the smallest of companies in a supply chain. We are able curate lines of credit from multiple FIs, to ensure that every supplier in the chain is covered. The programs require zero  infrastructure changes for any stakeholder and disbursement is a simple, intuitive, effortless, almost ‘invisible’, one-click process that ensures that it becomes second nature for suppliers to utilize the program. Thereby creating a win for both Buyers and their Suppliers.

To know more about how your company can “Pay Early and Earn More”, please click here.

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