Cash flow is king — now more than ever for many businesses struggling to keep money flowing through their supply chains.
Extended payment terms and late payments are a nasty problem in the B2B payments arena, particularly amid pandemic-fueled market volatility. The major challenge with delayed payment practices is their tendency to catalyze: When a business gets paid late, it, too, will struggle to pay its own suppliers on time — or pay for other necessary expenses to continue operating.
“We have seen an increase of companies paying late due to the pandemic and lack of cash flow,” he recently told PYMNTS. “Companies ask for invoice payment extensions and then pay late, which creates a cash flow issue.”
Speaking with PYMNTS, Porter explored which industries have been struggling the most with delayed payments, and the opportunity for factoring to play a role in companies’ broader working capital strategies as they seek solutions for their cash flow conundrums.
The Big-Box Struggle
According to Porter, not every industry has faced the same late payments challenge.
“We saw big-box retailers extend payment terms to 90 days,” he said, pointing to companies including Target and Costco as some examples. “Companies working with these large retailers have no choice but to comply with the extended payment terms, finding their cash flow severely impacted.”
The apparel industry has recently found itself in a precarious situation as a result of store closures, with brands like H&M and Topshop raising concerns for their supplier base at the height of the pandemic.
H&M, for example, placed as much as $4 billion worth of vendor orders in limbo after canceling orders from partners in Bangladesh last April, though it said at the time that it would adhere to previously agreed-upon payment terms for orders already placed. More trouble could be ahead, with the retailer announcing last week that it would close 250 stores, attributing the move to an increase in online shopping rather than cash flow issues.
For Porter Capital, the result has been a “less aggressive” risk strategy with companies in the retail space, as well as in the oil and gas sector, said Porter.
Factoring in all Options
Factoring, which involves a business selling its unpaid invoice at a discount, can be a valuable working capital tool, particularly when accounts receivable grow stale. But the financing solution can have a risky reputation, with critics arguing that it can actually encourage businesses to delay payments while forcing suppliers to accept expensive discounts.
Yet as Porter explained, when working with the right partner, factoring can be useful in ways beyond connecting businesses to much-needed cash. “It allows a business owner to focus on growing their business, versus chasing down accounts receivable,” he noted.
For Porter Capital specifically, there are opportunities for clients to combine factoring with other types of financing based on inventory, equipment and real estate. Porter noted that the company works with businesses to ensure a proper capital structure based on their unique working capital needs — and can also connect those clients to Porter’s credit insurance policy, an increasingly important tool to ensure that businesses have a lifeline in case their customers’ invoices fall into delinquency.
Reports last month in The Wall Street Journal warned that a lack of access to trade credit insurance is hampering economic recovery.
There is no silver bullet solution to late payments and companies’ cash flow challenges. But through a combination of tools like trade credit insurance, factoring and other forms of financing, there are opportunities for organizations to establish a working capital gameplan and survive the current market volatility, even if late payments are a new reality for more organizations.
“There is a cash flow issue, regardless,” said Porter. “We are offering cash flow in real time to grow your business.”