In a recent blog, Why AP Automation Makes Sense During An Economic Slowdown, we discussed why AP automation makes sense for companies looking to improve their bottom line, even in a downturn economy. AP automation can help companies take advantage of early payment discounts, avoid late payment fees, and save on processing costs.
To further add to the points of this previous blog, negotiating early pay discounts with your vendors has now never been easier, especially in the current economic climate — here are some helpful tips when it comes to negotiating early pay discounts:
How are you paying your vendors?
One of the most common questions asked during the sales process of an AP Automation product pitch is, “Are you currently capturing early pay discounts from your vendors?” To which, we often hear the response, “My vendors do not accept early pay discounts.”
The truth is, that if you are paying your vendors with credit cards currently, your vendors have technically already accepted discounts. All credit cards take a transaction cut and processing fee off the top of every transaction, with the most common listed below—
PAYMENT NETWORK
| PAYMENT NETWORK | AVERAGE CREDIT CARD PROCESSING FEES |
| Visa | 1.29% + $0.05 to 3.29% + $0.10 |
| Mastercard | 1.39% + $0.05 to 3.29% + $0.10 |
| Discover | 1.58% + $0.05 to 3.28% + $0.10 |
| American Express | 1.5% + $0.10 to 3.15% + $0.10 |
Negotiating which payment methods you use with your vendors provides a high degree of leverage in negotiating discounts.
Who are you negotiating with?
Understanding the target audience within your vendor’s company is also key to negotiating discounts. In order to be successful in negotiating early pay discounts, it requires both parties be:
1) In the right frame of mind.
2) Have a deep understanding of how alterations in your payments can bring savings and benefit to both of your companies.
Oftentimes, negotiating early pay discounts fails because you’re speaking with the incorrect contact.
The true cost of Accounts Receivable Financing
The current economic climate has created a lot of leverage for purchasers in negotiating early pay discounts. Here’s the reason why—
· The current average interest rate (as of this blog) is 7.32%
· 70-80% of institutions advance AR financing.
· Vendors tie up 20-30% of their capital financing receivables.
· Increased interest rates on asset-based lending.
· More businesses are using factoring.
So, how do your current payment terms affect your vendors? —
Financing Type
| Financing Type | Average Cost Per Month | NET 30 | NET 60 | NET 90 |
| Bank Financing | 0.61% | 0.61% | 1.22% | 1.83% |
| Asset-Based Lending | 1.20% | 1.20% | 2.40% | 3.60% |
| Factoring | 2.40% | 2.40% | 4.80% | 7.20% |
It’s estimated that financing buyer’s invoices cost the average company 3%.
The Buyer’s Dilemma is being negated
Some organizations are simply not interested in capturing early pay discounts, as they would rather stretch their payments to improve cash flow and invest that money strategically. However, many organizations are cutting project costs and investments in the current market. In fact, companies not interested in capturing early pay discounts in the past, are now behind, and likely losing out on massive savings opportunities.
International Trade Wars
Trade wars with countries such as China are driving buyers to look at other markets for suppliers. As more goods are being procured from other countries with more robust credit infrastructure, this provides the opportunity to capitalize on more discounts.
How does your organization compare to others?
How does your company fare to the competition? Are you behind?
· Companies are currently capturing ~20% early pay acceptance on PO spend.
· The average company takes 67 days to process an invoice.
· 52% of businesses are currently seeking extended payment terms.
· There’s approximately 3% in hidden discount opportunities for PO spend.
Timing, Preparation, and Flexibility
Timing Matters. You want to make sure you’re getting the best discount possible for your payments, so plan accordingly and adjust your payment schedules as needed. Aim for a deadline that gives you enough time to properly review invoices and decide whether or not to take advantage of the discount.
Be Prepared. Know what you need from the vendor before discussing payment terms and discounts—this includes any special requirements, such as early payment discounts or longer credit terms. This will ensure that the conversation is productive and both parties can reach a mutually beneficial agreement with respect to payment terms.
Stay Flexible. Negotiating with vendors isn’t a one-time thing—you want to ensure you’re always getting the best deal possible, so periodically review your payment terms and be open to making adjustments as needed.
Make AP Automation Work For You. AP automation can make it easier for companies to take advantage of early pay discounts and provide a great way to save money in the long run. Automation allows for faster invoice processing and payment times, giving companies more control over when they issue payments, while providing visibility into how much they’re taking on each transaction.
How EZ Cloud Assists in Early Pay Discount Capture
- Doesn’t necessitate payments for customers, allowing our customers to use any payment system of their choosing.
- Opens communications with vendors with features such as the supplier portal.
- Dozens of metrics and dashboards assist customers in improving their invoice turnover rate and identifying problematic suppliers.
With EZ Cloud’s AP automation solution, companies can be more proactive with their payments and take advantage of early payment discounts easily and quickly, helping them to stay competitive in the current economic climate.
