How Supply Chain Finance Can Help with a Client's Delayed Payment
One of the most problematic issues business owners face is delayed payments from clients. Delayed payments not only prevent a company from reconciling their accounts, but they can also prevent companies from growing. Instead, businesses are often using valuable time and resources working to obtain payment of these invoices when they could be using those resources for business development. International trade finance companies can help minimize the detriment caused by delayed payments.
The Issues Caused by Unpaid Invoices
Maintaining large, unpaid accounts receivable can be detrimental to a business. These delayed payments will create cash flow issues for the buyer because they are unable to obtain products that are crucial to conducting business. As a result of not having product a company:
- Will have to turn away business.
- Loses the ability to grow.
- Can become insolvent.
The seller can also suffer consequences. Since the buyer is not able to pay, the supplier is unable to meet their obligations. Meanwhile, as the delayed payment cycle continues for both the buyer and the supplier, the demand for products can begin to deteriorate as clients find the product elsewhere.
Unfortunately, in many industries, delayed invoices are often a common occurrence. Contracts may not be paid for as many as 180 days or more. Some contracts go through a rigorous system of approvals before payment is issued. While these contracts will eventually be paid, if the payment outstanding is worth tens or hundreds of thousands of dollars, current cash flow for the seller can be severely impacted.
How Supply Chain Finance Companies Work
When a company wants to purchase goods from another company, they need to find a way to pay for them. They can either draw up a contract that lays out payment terms or find the means to get funding. Most companies require payment for the product up front. To the buyer, this means finding a bank loan or other forms of credit. Credit is often difficult to qualify for. One solution to the credit issue is supply chain financing.
Like banks, supply chain finance companies help provide funding to a business for the purchase of product from another business. Since banks are more regulated, they are often difficult to obtain a loan from, even with good credit. However, a company may be able to acquire financing through a trade financing company, like Tradewind, without having to deal with the complexities of a bank loan.
Supply chain finance allows suppliers to be paid in advance. There is no waiting for end user sales from a buyer. The finance company uses the creditworthiness and financial strength of the buyer to extend funds toward the goods purchased. A company can receive financing through:
- Purchase order funding
- Letters of credit
- Inventory lending
- Structured guarantees
This allows the buyer to stay in business and continue to purchase and sell products as needed. It also allows the seller to continue to produce the product. Then the buyer pays the invoice to the finance company based on the terms of their contract.
Using Supply Chain Financing to Stay in Business
Suppliers cannot operate if they are not being paid. The main issue they have is they have multiple buyers requiring product on a regular basis, whereas those clients are often selling to a smaller market. Therefore, if suppliers are not paid in a timely manner by many clients, this may cause a cease in production due to lack of funding.
However, when a buyer uses supply chain financing, this enables prompt payment. The finance company pays the supplier and receives payment from the buyer when its invoices are paid by the end customer. Thanks to this financing process, suppliers can stay afloat and not lose money when working with a buyer.
In many industries, product is needed immediately. However, payment is not a top priority. Companies involved in a supply chain often have large overhead and require payment quickly to continue to operate. Supply chain financing through an international trade finance company like Tradewind allows payment to be made promptly and the supply chain to continue to operate.