On its surface, the late B2B payments fight is a clear-cut effort to get large corporates to stop abusing small suppliers that lack the leverage necessary to get paid more quickly.
But take a deeper look at the issue, and it quickly becomes convoluted and complex. Yes, some corporates may intentionally withhold payments to suppliers for longer than what was agreed. Yet, more often, suppliers’ cash flow constraints can be traced back to a variety of converging factors that have more to do with lengthening payment terms than they do with intentional late payments.
Understanding that difference between long payment terms and late payments is key to understanding how to address the issue and support small businesses’ financial health. Invoice finance is a tool that has been relied upon for decades to fill the cash flow gaps for businesses as they wait to get paid, but over the years, said Hydr Co-Founder Hector Macandrew, it’s a financing tool that has developed a negative stigma.
Speaking with PYMNTS, Macandrew explored how businesses can use invoice finance responsibly and effectively to combat that stigma and help businesses that are waiting to receive payment improve their cash flow.
Invoice Finance’s Biggest Flaws
One of the biggest challenges in the invoice financing ecosystem today is what Macandrew described as a “mathematical” issue related to pricing and fee structures. Financiers can be quite opaque and offer complex structures that change the overall cost of invoice financing depending on what percentage of an invoice is being finances, subscription fees, charter listing fees, various charge rates and more. It makes it extremely difficult for businesses to understand what they’re paying for or to compare one invoice financing offering to another.
There is another unfortunate reputation in invoice finance that Macandrew said can deter small businesses away from what could be a useful tool.
“Even though invoice financing has been around for some time, there is a stigma attached to it,” he said. “It’s almost admitting failure, for some reason, to have to get a third party involved. … Invoice financing companies are, in some instances, seen as a lender or resource of last resort.”
It’s a “philosophical” issue of the invoice financing world that can make the often-erroneous assumption that a small business using this solution is inadequate at managing cash flow.
Late Payments Versus Longer Payment Terms
Critique against the invoice finance arena has also stepped into the discussion surrounding late B2B payments. Opponents of the solution argue that, in addition to a lack of price transparency, invoice finance can perpetuate the very pain point it promises to address. Financing an overdue invoice has no impact on the business customer’s payment behavior, after all.
Macandrew noted that it’s important to make the distinction between late payments and longer payment terms typical of some of the largest corporations.
“They have very complex finance functions, and they simply cannot offer payment terms that are less than 90 days,” he said. “They need 120 days, or even longer.”
But, he added, “they take great pride in the fact that they never pay late. They simply have to ask their supplies to endure quite long payment terms.”
These are the scenarios in which invoice financing can be most helpful. Historically, these lengthy payment terms have created a barrier for small suppliers to work with what could be lucrative and long-term corporate customers with big contracts to offer. By filling in cash flow gaps for invoices with a very low risk of nonpayment, those small businesses can take advantage of valuable clients without worrying about the cash flow gaps that might result.
It’s where U.K.-based Hydr positions itself, launching an invoice financing solution that finances the entirety of an invoice with transparent pricing. The company emerges at a time when B2B payment terms continue to grow longer and when cash flow management has become paramount to the survival of small businesses.
Late payments — the payments that arrive well past their agreed-upon due date — are among the many threats to the success of those small businesses, and while invoice financing can help in these cases, Macandrew noted that it’s a challenge that should be addressed through lobbying with government entities like the U.K.’s Federation of Small Businesses.
“We’ve got to be part of the conversation,” he said. “We all need to be far more vocal about that because it’s just not right. It’s not fair. And it shouldn’t be perceived as and commented on as just being unreasonable.”