On top of all that’s hurting small businesses today, another long-standing practice is quietly freezing approximately $900 billion in receivables from reaching their hands. This practice is trade credit. New independent research by Frost & Sullivan reveals how small businesses could achieve between 25% and 35% in growth by adopting next-generation credit and payments solutions.
The Trade Credit Dilemma
Trade credit, also known as net terms, payment terms, dating terms, or business credit, is the practice by which some companies (like manufacturers) offer their business customers (like retailers) the convenience of buying now but paying at a later date, often net 30, 60, or 90 days. This convenience is a double-edged sword. By enabling higher-volume sales, trade credit helps small companies compete, but it inhibits their growth in many ways.
Because they don’t get paid right away, small businesses mentioned in the Frost & Sullivan study said they often face cash flow problems and other risks associated with trade credit — a process that essentially requires their accounts receivables staff to act like financing and collections departments. Respondents cited these specific effects on growth:
- Difficulties supporting new product initiatives
- Restricted ability to invest in strategic growth programs
- Difficulties floating the capital to pay for product manufacturing and inventory, which becomes more challenging for larger orders
- Reduced investment in sales and marketing
- Missed sales opportunities due to credit rejection
- Obstacles investing in next-generation business tools and technologies
Managing Trade Credit Also Has Hard Costs
By requiring staff to conduct the necessary credit and financing tasks required to manage the business’ ability to offer net terms, Frost & Sullivan’s analysis indicates that the cost of managing a net terms program, on average, can add approximately 8% to 10% to the total cost of business operations. They postulate that if payments were immediate and automated costs can be reduced by up to 10%.
The Growth Advantage of Immediate Payments
Immediate payments would enable less internal costs to be diverted to checking and managing credit and collections efforts. Early payment discounts could also be eliminated. The money thus saved could then be put to use more productively. As the Frost & Sullivan research suggests, “Small business B2B sellers could increase revenues by 25% to 35% if payments were received immediately and invested in strategic growth activities.” Such force-multipliers of growth may include:
- Expanding production capacity
- Purchasing inventory in a timely manner, and
- Investing in new product innovation.
