This month, a study on British businesses revealed a startling finding: In 2012, £199 billion—or $333 billion—would have been injected into the British economy if suppliers were paid in 30 days, instead of the average 58.
While late invoice payments certainly hurt suppliers and the economy, could it be that even businesses that pay suppliers on time are still paying too late? Yes, the study suggests. With current interest rates, often the best option for businesses and for the economy is to pay suppliers early, before an invoice is due.
But why are businesses opting to not pay earlier? A company’s history is likely to play a role. When interest rates soared in the 1970s and ‘80s, corporations extended payment terms, as they could gain meaningful returns by holding onto their cash. But now, we live in a near-zero interest rate environment. Businesses make paltry returns if they hold onto their money. Obviously, there are other good reasons to hold on to cash besides return on interest—such as pending acquisitions and seasonal business—but interest rates are usually a main factor. And yet many companies have been slow to reevaluate their supply chain finance and look for ways to make it stronger and more efficient.
That’s because many organizations, even those that can afford to pay suppliers early, don’t see any incentive to do so. This mindset speaks to a growing problem not only in the U.K., but in the U.S. as well: Too often businesses view their suppliers as just another bill that needs to be paid. But in truth, your relationships with suppliers matter. An efficient, thriving supply chain finance is crucial to running a successful business.
Strong supplier relationships are vital for a number of reasons. Suppliers provide the lifeblood of your business, they can jump ship and serve your competitors, and it costs you time and effort to find and onboard another supplier should one of yours go under. Not to mention that if a supplier is unhappy with your company, the quality of the product may decrease, the supplier may look for ways to nickel-and-dime you, or they could tell other suppliers to avoid doing business with your organization.
Clearly, your suppliers’ success is in your best interests. And the quickest way to build that relationship is to value your supplier and treat them as more than another bill. One way to immediately improve your relationships is simply to pay suppliers earlier. In fact, paying early can be the difference between survival and insolvency for your supplier—onecompany found that 90 percent of small business failures are caused by poor cash flow. Receiving an early payment frees up a supplier’s cash flow, allowing them to invest in their business, make payroll, and avoid unsavory short-term loan options.
There’s also a tremendous financial incentive for businesses to pay early. Many suppliers will agree to give a discount on an invoice in exchange for it being paid early—which can add millions of dollars a year to a company’s bottom line. Last month, Forbes argued that, “With rapid advances in accountancy technology, there’s no longer any excuse for late payments.” For businesses that can afford to pay early, there’s little excuse for an on-time payment, either.
With a growing number of consumers demanding corporate responsibility from companies—there’s never been a better time to support small businesses and the economy by re-evaluating your relationships with suppliers.