Trade Finance: From Cash Flow Necessity To Competitive Advantage

With B2B payment terms continuing to lengthen in the global market, cash flow management continues to play a critical role in the survival of traders, particularly the smallest firms. A proliferating trade finance market has emerged largely as a result of this cash flow crunch, linking B2B traders with a wide range of solutions to inject external capital into the flow of funds between buyers and suppliers.

These current market conditions have helped shape the dynamic between cash flow management and trade finance, with many small suppliers turning to external finance out of necessity — either to access financing while they wait for their customers to pay invoices, or to link their customers to financing as they struggle to pay invoices themselves.

But Fundbox Vice President, Business Development and Partnerships Jason Smith says business financing tools like lines of credit and factoring are no longer a last resort for B2B traders. Rather, they can be instrumental in helping suppliers maintain a competitive advantage with their corporate customers, and in developing deeper business relationships and loyalties through the supply chain.

“From a capital perspective, there’s a feeling that the seller actually has a buyer’s financial interest aligned much better than they have in the past,” he told PYMNTS in a recent interview.

In the past, while vendors could either accept payment or extend their own trade credit to customers, the dynamic was rigid and “very transactional,” Smith noted. Today, companies have the opportunity to introduce greater flexibility into the buyer-supplier transaction without either side having to forfeit their own cash management needs.

“Now it’s, ‘We understand that you’re a growing business,'” Smith said of suppliers’ financial relationship with buyers. “‘We want to help you manage the flow of funds.'”

How to Position the Financing

A corporate buyer’s own cash flow constraints represent one of the most prominent reasons why businesses are paying their B2B invoices on longer and longer payment terms. Of course, this also means that a vendor’s cash flow is negatively affected, so when suppliers want to offer trade credit to clients, they can rarely do so without turning to an external finance provider.

The challenge with this strategy, Smith explained, is that the need to direct customers to an external third party adds more friction to an already complicated business-to-business transaction. By enabling suppliers to integrate a financing tool within their own platforms and websites, and bridge customers directly to that third party, they can provide capital as “an extension of the seller’s brand,” he said.

Historically, buyers have been reluctant to move forward with an extra step of the B2B buying experience by going to a third-party funding provider as directed by their supplier. They have also struggled to manage the friction and security risk of providing sensitive information, like Social Security numbers and bank data, to their vendor via fax or email in order to secure that capital — another process that can damage the buyer-supplier relationship.

Deepening the partnership between a vendor and a third-party finance provider means a seamless connectivity between buyers and financing. And that, Smith said, means an improved relationship between the buyer and supplier.

Forging Deeper Buyer-Supplier Ties

Securing credit to be able to offer longer payment terms to customers or seamlessly directing them to external financing can be a competitive advantage to vendors. Offering flexibility in that credit relationship can be essential to securing more business, too, according to Smith. For Fundbox, that means establishing relationships with a vendor’s own customers to reduce the friction of capital flow, as well as focusing on transparency: If a customer agrees to 60-day payment terms as offered by a supplier, yet fails to pay within that time frame, the repayment process then automatically moves over to Fundbox, which provides choices in how and when those companies repay.

A lack of flexibility can quickly erode the quality of a buyer-supplier relationship, Smith said. A vendor that is unwilling or unable to offer extended payment terms to customers can lose business, while a customer who pays late risks losing a future contract, too.

Conversely, injecting that flexibility not only promotes stronger buyer-supplier relationships and promotes customer loyalty, but Smith said suppliers are also seeing revenues increase.

“From a relationship standpoint, it really erodes when there are payment issues with the buyer back to the seller, or if something unforeseeable comes up, and a buyer needs an extension. It just creates friction,” he said. “From a dollars-and-cents standpoint, we’ve seen a lot of buyers on our seller platform that want to spend more. It’s a better relationship that the buyer and seller are developing, but we’re seeing average order values increase as well.”

An integrated, flexible financing tool that positions itself seamlessly within the buyer-supplier relationship is, of course, not the only ingredient to boosting customer loyalty. Smith acknowledged that both buyer and supplier have to take the initiative on developing deeper, long-lasting ties with each other.

But when organizations focus on the experience of financing and cash flow management on both sides of a B2B transaction, they introduce a competitive advantage that Smith says is “one piece in the arsenal of overall relationship management.”