Most companies depend on fast access to bank credit to ensure a smooth workflow for their operations. In fact, money needs to be readily available as a substantial amount of resources is invested by firms in inventories, client receivables and, of course, equipment and machinery.
As a result of their operating conditions, there is often a mismatch between the timing of collecting money from customers and that of paying to suppliers, personnel, and the Tax Office!
To make up for that mismatch, companies can typically call on their owners for permanent funds to be available for covering these financial needs, or take credit loans. Often, however, owners either want to limit their financial exposure to the firm while banks may set up strict credit limits or impose exceedingly high costs on short-term lending.
This is where customer invoices’ advance payments step in. Although firms intuitively don’t want to see their operating margins be reduced, accepting prompt payment discounts may nonetheless be a very rational and cost-effective option to external funds from other sources. In fact there may be a number of key advantages in promoting prompt payment discounts:
Advantage nr. 1: Since the payment risk is related to their customers credit rating and not that of the invoice issuing firm, often the implicit financing costs when accepting prompt payment discounts is very much lower than the usual short-term borrowing costs (see another article on Das Kapital blogue section on “Computing Annual Percentage Rates (APRs) when a firm is selling invoices”
Advantage nr. 2: Accepting prompt payment discounts creates immediate liquidity for companies and help to lower debt ratios (like Debt/assets, Debt/EBITDA or EBITDA/Interest charges), thus helping to reduce financial leverage ratios and the perception of financial risk by banks and other debtholders.
Advantage nr. 3: Accessing funds by accepting prompt payment discounts using the DasWork platform is an easy and fast process, enabling the immediate receipt of customer invoices. In other words, allowing for the firms to stop worrying about collecting receivables with extended maturities that do not match payment needs and, instead, fully concentrate all of their efforts on what really counts the most, ie, selling, producing and delivering the best products and services possible for their customers in the most cost-efficient way!