There’s no denying the current economic climate has been marked by tight credit markets and ongoing uncertainty. It’s understandable, then, that small to medium-sized enterprises (SMEs) are increasingly looking for new ways to maintain their liquidity and stability.
While receivables finance — borrowing against outstanding invoices — has long been a popular strategy for managing cash flow, there’s a growing shift towards payables finance as a smarter long-term solution.
Receivables finance has long been a staple for businesses wanting to unlock cash tied up in unpaid invoices. By providing immediate working capital, it’s a strategy that allows owners to cover operational expenses without waiting for customers to pay. The problem is that — as effective as it may be — receivables finance carries inherent risks, particularly in an economy like right now where customer-payment defaults are on the rise.
Here’s the reality: business payment defaults surged by 52% year-on-year in June 2023. That should serve as a stark reminder about the growing challenges of relying solely on receivables finance.
“The risk with receivables finance is that if your customer goes bust before they pay, then many financiers will want the money back, which can put your own business at risk,” says Wayne Morris, Director at Fifo Capital. It’s a risk that is particularly acute in industries where customers are increasingly facing financial difficulties, making the pursuit of alternative financing more important than ever.
As businesses grapple with the limitations of receivables finance, payables finance is looking more and more like a compelling alternative. Not only does it allow businesses to extend payment terms with their suppliers, it also means those suppliers are paid on time, every time. Here are four reasons why payables finance is particularly attractive in an economic environment where good cash flow is all-important.
By extending payment terms, your business can retain more capital for essential expenditures, which is particularly useful in industries with long cash-conversion cycles. Payables finance lets companies access the funds they need right when they need to purchase components or raw materials, rather than tying up their cash reserves.
“Financing a smaller invoice through payables finance is more efficient because you’re funding just the raw materials, not the entire invoice with markup and profit included,” says Morris.
2. Stronger supplier relationships
Making payments on time to your suppliers is something every business owner wants to stay on top of. And with payables finance, it can result in better terms, lower costs and stronger partnerships. The problem is that in today’s market, late payments are becoming more common, so maintaining a good relationship with your suppliers is vital.
“Using payables finance strategically can help you capitalise on discounts for early payments or bulk buying, improving your overall cost efficiency,” says Morris. Being able to negotiate favourable terms can also boost your purchasing power.
Unlike receivables finance, which relies on customer payments, payables finance focuses on your own ability to manage your obligations. This reduces the inherent risk of customer defaults, as your business can meet its payment obligations even if payments to you are delayed.
“Payables finance improves working capital by providing funds right when you need to purchase components, rather than stressing about your own cash reserves,” says Morris.
If you’ve dealt with banks recently, you’ll be aware that traditional lending criteria are becoming more stringent. But payables finance can give you greater predictability over your cash flow management – it’s a big advantage in an economic climate shrouded in volatility and tightening credit conditions.
In essence, payables finance can give SMEs the flexibility they need to manage their working capital more effectively, as it will allow you to optimise your cash flow without relying too much on customer payment schedules, which can be very unpredictable.
While it’s true that the market is currently mired in economic uncertainty and tightening credit conditions, payables finance is proving to be the ‘new black’ for SMEs. It’s a secure, flexible and strategic way to manage your cash flow, while at the same time reducing the risks to your own business and strengthening supplier relationships.
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Fifo Capital empowers SMEs to optimise their working capital and put an end to cash flow problems. With Fifo’s award-winning finance solutions, you can access up to $2 million in revolving funds to supercharge growth. Beyond financing, Fifo’s expert team offers unwavering support, guiding you through common pain points such as late payments, rising inventory costs, overheads, and sales fluctuations. Take the strategic leap into sustainable finance and break free from the trap of quick fixes. Partner with Fifo to secure your business’s future. Do More. Win More. Grow More. With Fifo.
