Since the 1920s, credit cards have enabled merchants and consumers to conduct critical business transactions that benefit both parties – merchants receive risk-free, real-time payment on sales, and consumers are allowed several weeks to complete payment on purchases. This form of business-to-consumer (B2C) credit has largely contributed to the formation and success of the world’s economy. Yet, this concept has never translated into a payment model for merchant-to-merchant (B2B) businesses – a segment of the market that represents billions upon billions of dollars. Small and medium-sized businesses across the world extend trade credit to their customers on the premise that they will eventually get paid. Unfortunately, however, businesses often wait several weeks to receive payment and some invoices are not paid at all, leaving millions of dollars in what can be thought of as the black hole of trade credit. The B2B credit model has hindered growth and sustainability in the SMB market, especially in times of financial crisis. Small business owners are calling in favors with family and friends and pouring their personal finances into businesses to keep them afloat in the face of a frozen lending market and late payments. Businesses should correct this system and take a cue from the consumer credit model for best practices in customer credit before it’s too late. Here is a breakdown of what aspects of the B2C model would work for the B2B market. Accelerated Payment In the B2B space, it generally takes a business 56 days to get paid by its customers. For a company selling $20,000/week, that’s eight weeks of sales outstanding, which equals $160,000 in untouchable assets. On top of that, businesses are constantly racking up invoices with their own vendors – meaning businesses are typically being drained on both ends of the books. What would the difference be for a small business if it could have guaranteed access to 90% of its capital almost immediately rather than in 7-8 weeks? There are several financing solutions on the market that provide lines of credit and alternative sources of funding for SMBs so that they can leverage the cash flow that they need in a reasonable period of time. Traditional options include applying for a bank loan (although these are hard to come by in unsteady economic times) or factoring your account receivables. Factoring provides immediate access to cash, but it can be very expensive (24-34%) and potentially damaging to a customer relationship. An additional approach for B2B businesses is alternative financing from financial institutions and nontraditional funding providers. An exceedingly popular method of alternative financing is securing an accounts receivable line of credit from a financial institution in partnership with a monitoring firm. Credit monitoring firms enable banks to lend against accounts receivables at bank loan rates by managing a business’ A/R and transforming it into transparent, le... |