Recession or Not, Early Payment is the Strategic Financial Advantage We All Need

Recession or Not, Early Payment

By PJ Bain • Published March 14, 2023 • 4 minute read

If asked to describe the current global economy, the word “baffling” comes to mind. At the first of the year, the prevailing data and narrative indicated a recession was imminent. Fast forward to now and the indicators suggest fears of a global recession may be easing. Economic performance in the U.S. and Europe has been better than expected, which will likely lead to central banks raising interest rates again soon. But that doesn’t mean the guards are coming down – especially for global companies susceptible to varying regional headwinds and supply chain risks. Volatility is still the guiding principle for finance leaders as they wade into the uncertainty of 2023.

Smart companies will continue to operate in recession-ready mode as the economic teetering persists. Their priorities will remain laser focused on reducing financial risk and failure points in the supply chain. And finance and business leaders will seek strategic advantages that make their operations more resilient and flexible as economic conditions fluctuate.

Early Payment as Important as Ever

Early payment solutions continue to play an important role in achieving the resiliency and flexibility required in the supply chain. During the pandemic, suppliers relied heavily on supply chain finance to withstand disruption and uncertainty. That hasn’t changed as business leaders have encountered new volatility. Our data shows that suppliers continue to have a strong appetite for early payment with global trade ratios at an average of 76% across 2021 and 2022. Historic interest rate increases have had zero impact on supplier trading behavior over the last 5+ years. despite the base rate fluctuating between 0.1% to 3.5+%.

Looking back across the last three years, early payment solutions have proven to be valuable in a multitude of economic conditions. When the pandemic hit, it provided a desperately needed liquidity lifeline. Throughout 2020 and 2021, there was more pressure for suppliers to quickly boost production as business continued to come back online and ramp up to pre-pandemic levels. Once again, early payment solutions – supply chain finance, in particular – played a vital role in providing the liquidity required to make that happen. In 2022, as inflation and interest rates surged, companies encountered a new wave of cash flow pressures. Paying down debt became paramount. Many sub-investment grade businesses needed access to affordable liquidity as they encountered rising supplier and production costs.

Today, supply chain finance is still providing critical cash to buyers and suppliers as they respond to demand fluctuations, persistent supply chain shortages (including labor), inflation, and geopolitical dynamics. The need for more innovative, transparent, and broad-reaching early payment solutions is greater than ever before – especially among suppliers.

The Balance of Power Between Buyers and Suppliers is Shifting

One thing we’ve witnessed on this three-year journey of disruption is that the balance of power has shifted among buyers and suppliers. In short, buyers have historically called the shots in the supply chain and suppliers either fell into line or fell out of favor. That’s no longer the case. The last few years have redefined what it means for buyers to have a strategic relationship with their suppliers. Buyers have come to realize they have to collaborate with their suppliers across many disciplines to mitigate uncertainty, including finance. How can I strengthen the financial health of my key suppliers isn’t an altruistic question – it’s common business sense and key to supply chain resiliency. It’s also forward-looking at a time when many businesses are focused on navigating only the most immediate economic challenges.

Uncertainty and volatility aren’t going anywhere anytime soon. It doesn’t matter if we’re in a recession or recovery, or a boom or bust market. Cash flow collaboration between buyers and suppliers today not only greases the wheel for fiscal resiliency tomorrow, it also greases the wheel for strategic market advantage.