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

By Nathan Feather • Published February 14, 2023 • 4 minute read

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.

Supply chain finance is one option for early payment, but what about those suppliers that don’t have access to a buyer-led supply chain finance program? Suppliers can enjoy the same benefits of early payment through Accounts Receivables Finance solutions, which allows suppliers to sell their invoices to funders minus a financing fee prior to its customer paying the invoice. This allows suppliers to increase cash on hand and immediately improve cash flow. There is also the option for some suppliers to create their own supply chain finance program.

If you’re a supplier participating in an early payment program, , give yourself a pat on the back – you already have a powerful tool at your immediate disposal. If you’re interested in learning how to start, contact us for more information. Now is a good time to advance payment on any remaining available approved invoices so you can strengthen your balance sheet and start 2023 strong.