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.
Fundbox Net Terms Can Provide a Solution
To achieve these growth projections, Frost & Sullivan outlined the need for
cost-effective and automated credit and payments solutions — solutions that give sellers (merchants) immediate access to funds, while still offering their B2B customers the ability to pay later, using the net 30, 60, or longer terms they have come to expect.
Since 2018, Fundbox has provided such a solution, now called Fundbox Net Terms. In just minutes, Fundbox can assess whether a B2B seller’s customer is eligible for net terms. No credit check or paperwork is needed to get started. If approved, Fundbox can extend trade credit to the buyer (for example: net 30, 60 or 90 days). Once an approved buyer places an order, Fundbox can then pay the seller as soon as the next business day.
Frost & Sullivan’s analysis confirms that Fundbox Net Terms is an example of a next-generation credit and payments solution that can allow B2B sellers to offer trade credit without the trade-off in growth.
How Fundbox Net Terms Drives Growth
The Frost & Sullivan report presents several ways that the Fundbox Net Terms solution could drive growth for small business merchants. These include:
- Increasing average order value (AOV) – Fundbox Net Terms gives buyers the opportunity to place larger orders and stock up knowing they have more time to sell the inventory.
- Acquiring new customers – Fundbox Net Terms allows sellers to offer net terms to a broader selection of buyers that were previously considered too risky or too new to qualify for net terms.
- Automating trade credit management – By automatically keeping track of late payments, credit approvals, and reconciliation, Fundbox Net Terms makes it easy for small businesses to expand their trade credit program.
- Supporting high-touch customers – Net terms can be customized for each buyer, so a seller’s key, high-touch, high-value customers can get exactly the terms they negotiate with the seller.
- Solving some cash flow issues – By paying sellers faster, Fundbox Net Terms can help solve cash crunches that commonly come when manufacturing big orders or having to meet the demands of extending longer terms.
The Bottom Line
With all of these growth-driving advantages, including the ability to mitigate the estimated 10% to 15% additional expense of managing an in-house trade credit program, Frost & Sullivan’s analysis indicates that B2B sellers can increase annual revenues by 25% to 30% with a full migration to Fundbox Net Terms.