The first tangible benefit from using a Digital Trade Credit solution is that it draws together multiple processes currently undertaken by a number of teams using a variety of solutions and external providers into one place.
In doing so, it enables merchants to achieve a number of direct cost savings compared to the traditional approach to credit management. These saved costs fall into three broad categories, namely the cost of buying payment and trade credit-related services, the cost of labour, and finance-related costs. Each of these is discussed in more detail in this article.
The cost of buying payment and trade credit related services
At each step of the trade credit lifecycle presented in the previous section, merchants have to invest in solutions and services to support their operations. Alternatively, they have to develop the appropriate capabilities and create the associated resources internally; the challenge here being that, for all but the very largest companies, most merchants are essentially operating a sub-scale cottage industry, which cannot keep up with digital best practices. Of course, the exact approach varies according to the size of the company and the sector, with a varying blend of out- and in-sourcing, but even for smaller merchants there are a number of solutions and services costs that can come into play.
It is also important to remember that each solution brings IT integration costs that equally need to be factored into budgets. Appointing an agency to carry out IT integrations typically starts at around €20k and can run into hundreds of thousands of euros for larger projects.
Pre-trade solutions and services
In terms of pre-trade activities, one of the main costs to merchants is purchasing credit scores and/or company information to assess the creditworthiness of potential customers. For example, credit management teams will often run credit checks with company registries and buy credit scores from local credit bureaus. The unit cost of these varies, but they tend to range from €0.50 to €2.00 per company depending on the country and the volume bought. There can also be additional fees if there is a recommended credit limit and monitoring on top.
Alongside credit management, merchants also need to invest in fraud systems to authenticate customers and transactions. As presented earlier, fraud is an ever-evolving beast and solutions need to be able to keep up with the latest fraud threats, as well as ensuring that false positives are kept low to ensure that legitimate trade is not turned away. In comparison to the B2C space, there are limited B2B fraud detection systems in the market and the cost of implementing and integrating a solution is high; costs often run into tens of thousands of euros according to the size of the business and there are generally transaction fees to pay on top, which range from €0.01 to €0.10 per fraud check depending on volume.
Merchants also have to pay fees for accepting payments. Those merchants that accept card payments pay processing fees to a payment services provider, such as Adyen or Stripe. These fees are normally charged on a transaction basis, with the common practice being to charge a flat processing fee of around €0.10 and a percentage fee. This fee varies according to the payment card or digital wallet used and the country of issuance, but tends to range from 1–4% of the transaction value. Currency conversion and chargebacks all incur additional charges.
Merchants that do not accept card payments do not escape payment processing fees, for example, bank transfers to settle invoices also incur transaction fees, which can range from €0.20 to €1.50 depending on the bank and the type of account held.
Post-trade solutions and services
Most companies handle the collection of payments internally using accounts receivable solutions. There are multiple providers in the market and fees vary, but most vendors charge small businesses (with under €10m in turnover) in the region of €10,000 a year and for larger businesses, bespoke enterprise pricing comes into play.
To release cash sooner, some companies opt to use factoring firms to sell on unpaid invoices, but this also comes at a fee, with invoice financing rates standing at around 10% APR depending on the payment terms. There are also extra costs for late payments and sellers are usually still liable for any unpaid invoices, though “without recourse” factoring includes an additional price buffer to allow for bad debt.
And of course, not all invoices are settled on time. Based on Atradius’ 2022 Payment Practices Barometer, an average of 41% of B2B invoices in Western Europe are paid late and 6% are written off. For those invoices that remain unpaid, businesses have to engage collections agencies and bailiffs to recoup money outstanding, which often means paying commissions on debts recovered. Rates generally range from 10-20% depending on the business, though some collections agencies will manage all payments, including chasing late payments, and charge a flat fee of 1-1.5%.
Finally, some businesses also take out credit insurance to protect against non-payment. The cost of trade credit insurance varies by market, but by way of example, UK chartered insurance broker Rowland & Hames puts the cost of trade insurance at 0.15-0.3% of insurable turnover depending on sector, trading history and the types of customer to be covered. However, costs can be much higher - over 1% of insurable turnover - for businesses that are deemed riskier and to accommodate specific clauses - for example, maximum indemnity exclusions. Furthermore, most trade credit policies deduct 10% of the claim, so, at best, providers only receive 90% of the outstanding invoice.
The cost of labour
In drawing together all of these solutions and services, merchants stand not only to make direct cost savings, but there are also a number of associated labour and time costs to be realised. This starts with reducing the burden on procurement or operational leads to run multiple Request for Proposal (RfP) processes and negotiate commercials with several suppliers, which depending on the complexity of the business can take several weeks. The need to manage supplier relationships on an ongoing basis is also reduced.
From an operational perspective, a single solution approach also means that information is centralised. This provides B2B merchants with easier oversight of customer information and status and reduces the time spent extracting and transferring information between systems – an approach that can also increase the likelihood of errors and internal fraud.
Finally, at each stage of the trade credit lifecycle, there are efficiencies to be found, in terms of day-to-day resourcing, the associated technology support, and management oversight. Next, we examine each of these in more detail.
Pre-trade labour savings
Firstly, Digital Trade Credit enables merchants to reduce credit management workloads and the associated staff costs. The size of the credit management teams, of course, varies greatly according to the size of the business and the sector that they are in and the volume of invoicing that they do. For a small business with a €2m turnover, credit management may be a part of another role, from about €10m in turnover a B2B business will normally require a dedicated credit manager, and for those businesses with around €100m in revenues, a team of 3-5 people is needed. Above this, credit departments become even more extensive.
Ultimately, the challenge with credit management is that it is a cross-functional process starting with sales and involving multiple other departments, from the core credit function and accounts receivable to treasury, accounting and customer care. As such, regardless of the size of the company, there are numerous points at which inefficiencies creep into the credit management process. For some prospective clients, the credit decisioning can be straightforward and, assuming typical manual processes to retrieve credit information and review applications, will take 1–2 days. For other clients, the process can be lengthy and require significant management bandwidth. For example, customer support may need to follow up on missing information or days can be lost to negotiating payment terms, with sales and credit teams conducting their own internal discussions.
The use of a Digital Trade Credit solution helps to reduce the time spent on manually reviewing applications and determining payment terms, by taking a built-in approach to credit decisioning and risk management.
From a payment acceptance perspective, merchants often only offer a limited number of settlement options, which means that customer experience is sacrificed. Digital Trade Credit enables merchants to provide multiple payment options and to save on the labour costs that are normally associated with testing and monitoring these. When putting in place a new payment mechanism, for instance, weeks of staff time can be dedicated to integrating and testing various settlement methods and the underlying technology. Then, on an ongoing basis, technology and commercial teams can spend days each month monitoring acceptance rates and conversion ratios. Large, sophisticated e-commerce providers tend to take this even further by treating the checkout as a product and conducting continuous A/B testing programmes to optimise the checkout experience and identify the ideal mix of settlement options and payment plans.
Post-trade labour savings
From a post-trade perspective, there are a number of tasks that merchants have to undertake. One of the major tasks is buyer monitoring and ongoing limits management. Specifically, this involves following the evolution of a customer’s financial health and credit score, monitoring their payments behaviour and using this information to update and refresh that customer’s credit limits. Often this is a manual process and it is not uncommonly managed using spreadsheets. As such, it takes up staff resources, which if the process were automated could be more valuably deployed elsewhere. It also means that only a reduced proportion of companies on payment terms have their limits dynamically reviewed, so may not be receiving the level of credit they merit. For larger companies, full-time resources are also normally needed to monitor the credit portfolio and identify concentrations in lending, ageing balances and so on.
When it comes to collections, most companies will have dedicated resources in their accounts teams to perform banking reconciliations and allocate cash. Though importing data through open banking and the use of virtual IBANs can significantly speed up this process, the prevalent approach for many companies remains to perform manual reconciliations or source data by logging into online banking portals. And on top of the standard reconciliations, significant time is also spent supporting non-standard transactions, such as cancellations, refunds and disputed charges.
Finally, there are the resources needed to manage late payments. Research from the UK small business bank Tide shows that UK SMEs spend, on average, 1.5 hours a day following up on late invoices, which amounts to 46 working days over the course of a year. There is then the additional time spent to engage with collections agencies and credit insurers for when invoices remain unpaid.
Lastly, in addition to the cost of solutions and services and labour costs, Digital Trade Credit can also bring significant savings with regards to the financial costs associated with traditional trade credit. Often businesses do not factor these financial elements into cost assessments, but they are all part of the equation.
Risk related costs
One of the main financial costs relates to credit losses and fraudulent transactions, which as demonstrated in previous sections present a real risk to merchants. With 6% of B2B invoices in Western Europe written off, it only takes a few payment defaults to seriously hurt a merchant’s cash flow and have considerable repercussions on their business. For example, if a business with a profit margin of 5% incurs a credit default of €100,000, then that business will need to increase sales by €2m to compensate for the loss.
Credit losses, though not typically the cost of fraud, can be insured against to some degree. However, not all claims are accepted and even when they are, it is not standard for the full loss to be recouped. Not all merchants are insured of course, and even among those that are, many retain extra capital on their balance sheet to prevent the business from being bankrupted through non-payment and fraudulent transactions. By removing the need to hold such a large buffer, Digital Trade Credit enables businesses to optimise their balance sheets more effectively by reducing the amount of “risk capital” they need to hold to hedge against volatility.
Cost of liquidity
There is also the cost of liquidity to consider. In granting payment terms, the liquidity position of a merchant worsens, because they are paid later. If payment terms and the resulting impact on liquidity are not managed correctly, merchants can struggle with higher working capital needs, which affects their ability to grow.
Research from Allianz Trade shows that the average Days Sales Outstanding (DSO) globally in 2021 was 68 days, ranging from 44 days in New Zealand to 90 in China. Digital Trade Credit helps merchants reduce DSO to around 8-14 days, which enables them to convert trade receivables into cash much more quickly, thus improving the liquidity position of the business.
The question of liquidity also presents challenges when it comes to sales and customer acquisition. Large businesses, in particular, often request extended payment terms, which can become a sticking point in sales negotiations. For as much as businesses may want to supply large brand names, they have to be confident that they can handle extended terms from a liquidity perspective. The financing element of a Digital Trade Credit solution mitigates this issue, by allowing merchants to choose when they get paid, while their customers enjoy better terms.
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