Suppliers, There’s Never Been a Better Time to Accelerate Payment on Invoices

The era of radically low interest rates has ended. For many companies, this marks the winddown of affordable liquidity access. One indicator is the steady decline of cash ratios, which is a measurement of how well a company can pay its short-term debt in the form of cash and cash equivalents. In the U.S., median cash ratios have been trending downwards since 2020. Ratios for investment-grade companies fell to 18.0% in the third quarter of last year, and 28.7% for non-investment-grade companies.

The disparity between investment-grade and non-investment-grade cash ratios is telling. While many large, investment-grade companies may have access to multiple liquidity options, their smaller supplier base may not have the same “menu” available to them. For a lot of these suppliers, drawing down lines of credit may seem like the only option to quickly insulate the business from economic volatility. That’s a viable strategy when interest rates are low and liquidity is readily available – which is to say “not now.”

As companies seek to fortify their balance sheets, all eyes are on cash flow. In this business climate, no company can afford to have working capital trapped in their supply chain. This is especially true for suppliers that may not have the same access to affordable liquidity as their larger customers.

Supply chain finance offers suppliers a low-cost option to strengthen cash reserves while improving the balance sheet and reducing debt ratios

Accelerating payment on invoices via supply chain finance benefits suppliers in a multitude of ways. For one, getting paid early is a much-needed, cost-effective liquidity option. Suppliers can submit invoices for early payment to free up material sums of cash – all without taking on additional debt. Even better, smaller suppliers can leverage their customers’ strong credit ratings to secure more favorable rates than they would be able to get on their own. This cash can be used to mitigate financial risks, invest in growth opportunities, and pay down debt.

There are two benefits of using early payment to pay down debt, the first being that reducing debt ratios frees up a company’s credit utilization. Not only does this help the balance sheet, it also gives more flexibility to utilize credit lines during times of economic disruption and uncertainty.

The second benefit is that deleveraging – particularly right now – can save a company money in the long run. Unless a company has a very high, investment-grade credit rating, bank debt is likely more expensive than the cost of accelerating payment on approved invoices.

Now is the time to explore the benefits of early payment

One of the most powerful benefits of advancing invoice payment is that suppliers have the option to unlock cash almost immediately. Unlike cost-cutting or selling assets, which can still sit on the books for months, getting paid early has an immediate positive impact on a supplier’s balance sheet. Having cash on hand is helpful any time, but especially right now as economic pressures mount.