As key gatekeepers to financial risk in a business, the focus is on the Credit Management team to manage increasing risk as revenue flattens and margins compress, but at what cost?
In an increasingly competitive landscape, your sales team are incentivised to close deals. As a Credit Manager, you are likely no stranger to inheriting lengthy payment terms the sales team have used as leverage. The impact of one large deal closing may result in:
-An increase in the cost of working capital: Extending payment terms diminishes a company’s ability to re-invest in core business.
-An increase in the risk of defaults: Longer payment terms increase the risk of not getting paid at all.
Aligning key performance metrics... or not
Friction can often occur in a company where sales and credit team key performance indicators (KPI’s) are not aligned. This results in the credit policy taking a back seat in negotiations. As a Credit Manager, your obligation to manage and reduce credit risk whilst improving liquidity for the business does not vanish because you did not agree to proposed terms.
Tools such as credit insurance, trade guarantees and factoring can be used to mitigate these risks. These tools do come at a cost, can be complex to implement and impose a compliance burden on the credit management team.
Lowering risk without increasing costs and complexity
One option you may not have explored is to enquire whether your customer offers Supply Chain Finance (SCF).
SCF gives you as a Credit Manager, the ability to improve collection days at a cost that aligns to the credit profile of your customer. This is typically a far cheaper cost of finance than you are able to obtain through traditional factoring. You receive cash on a timeframe that aligns to your business need, while the SCF platform manager bears the risk of late or non-payment.
When is the best time to suggest leveraging SCF?
Contracting and deal negotiations are a great time for Sales and Credit Management to align on strategy. Creating a tactical RFP that leverages a promise to extend payment terms, with the knowledge that early payment can be obtained when needed might just push a deal over the line.
Benefits for a supplier leveraging an SCF platform:
-An SCF program generally costs next to nothing for a customer to deploy. Most platforms are fully web enabled and can be integrated into ERP systems.
-Reduced cost of finance.
-No additional compliance or reporting.
-Simple to use. The platform is online and with the potential to integrate with your ERP system or accounting platform.
-An accounting neutral outcome. SCF operates the same as if you accepted discounts for early payment, but in case, you are in control.
Charlotte Petris is founder and CEO of Timelio, an online marketplace enabling businesses to raise working capital by selling their customer invoices to a network of investors. She is a member of the federal government's Fintech Advisory Group and vice-president of Fintech Australia.
At Timelio, we are champions of businesses having the ability to grow with all opportunities presented to them, unrestricted by payment terms. We encourage all Credit Managers looking to free up working capital to explore SCF, and open the communication channels on strategy with your Sales Teams. This might just be the perfect opportunity for you to leverage an innovative solution while gaining stronger influence over impact on the working capital cycle at every phase of negotiation.