Hydr talks about financing invoices and late payments B2B
On the face of it, tackling late B2B payments is a clear effort to get big businesses to stop abusing small vendors who lack the leverage to get paid faster.
But take a closer look, and it quickly becomes convoluted and complex. Yes, some companies may intentionally withhold payments from suppliers for longer than agreed. More often, however, supplier cash constraints can be attributed to a variety of converging factors that have more to do with lengthening payment terms than with intentional payment delays.
Understanding this difference between long payment terms and late payments is essential to understanding how to fix the problem and support the financial health of small businesses. Bill financing has been a tool that has been used for decades to fill cash flow gaps in businesses while waiting to be paid, but over the years, said Hydr co-founder Hector Macandrew, it is a financing tool that has developed a negative stigma. .
Speaking to PYMNTS, Macandrew explored how businesses can use invoice financing responsibly and effectively to combat this stigma and help businesses waiting to receive a payment improve their cash flow.
The biggest flaws of Invoice Finance
One of the biggest challenges in the bill financing ecosystem today is what Macandrew described as a “math” problem with pricing and fee structures. Financiers can be quite opaque and come up with complex structures that change the overall cost of financing invoices based on the percentage of an invoice that is made up of finance, subscription fees, charter registration fees, various charge rates, etc. This makes it extremely difficult for businesses to understand what they are paying for or to compare one invoice financing offer to another.
There is another unfortunate reputation in invoice financing that Macandrew says can deter small businesses from what could be a useful tool.
“Even though invoice financing has been around for some time, there is a stigma attached to it,” he said. “It’s almost admitting the failure, for whatever reason, to have to involve a third party. … Bill finance companies are, in some cases, viewed as a lender or resource of last resort.
This is a “philosophical” question from the world of invoice financing that can make the often mistaken assumption that a small business using this solution is inadequate to manage its cash flow.
Late payments compared to longer payment terms
Critics of the invoice finance arena also entered the discussion regarding B2B payment delays. Opponents of the solution argue that in addition to a lack of price transparency, invoice financing can perpetuate the very problem it promises to solve. The financing of an overdue invoice has no impact on the payment behavior of the professional customer.
Macandrew noted that it is important to distinguish between late payments and the longer payment terms typical of some of the larger companies.
“They have very complex financial functions and they just can’t offer payment terms under 90 days,” he said. “They need 120 days or more.”
But, he added, “they take great pride in the fact that they never pay late. They simply have to ask their suppliers to endure rather long payment terms.
These are the scenarios in which invoice financing can be most useful. Historically, these long payment terms have created a barrier for small vendors to work with what could be lucrative, long-term corporate clients with large contracts to offer. By filling cash gaps for invoices with very low risk of non-payment, these small businesses can take advantage of valuable customers without worrying about the cash flow gaps that might result.
This is where the British company Hydr is positioned, by launching an invoice financing solution that finances an entire invoice with transparent pricing. The business is emerging at a time when B2B payment terms continue to lengthen and cash management has become paramount to the survival of small businesses.
Late payments – payments that arrive well past the agreed-upon due date – are among the many threats to the success of these small businesses, and while bill financing can help in these cases, Macandrew noted that he this is a challenge that should be addressed by lobbying government entities like the Federation of Small Businesses UK.
“We need to be part of the conversation,” he said. “We all have to be a lot louder about it because it’s just not fair. It is not fair. And that shouldn’t be seen and commented on as simply unreasonable. “