Small businesses are the backbone of the global economy, driving innovation that is upending entire industries and fuelling growth and jobs. But they’re facing some tough times. According to The Bureau of Labor Statistics’ Business Employment Dynamics, the number of businesses surviving past their first year dropped from 569,419 in 1994 to 106,789 in 2016. Furthermore, of the small businesses that opened in March 2015, only 79.9% made it to March 2016 – and only around half make it to the fifth year. Yet many small and emerging businesses continue to thrive by doing what got them to where they are: thinking outside the box taking a strategic approach to finding the capital they need to fuel their plans.
When it comes to managing capital, small businesses face a unique set of challenges – one of the biggest being as simple as getting paid.
Timely access to earned capital is crucial to supporting operations and driving growth. However, manual payment infrastructures still in play at many Fortune 500 companies often lead to delayed payments, making it difficult for small businesses to forecast cash flow – and plan/budget accordingly.
And they can be rife with errors. All too often, paper checks are delivered with incomplete remittance detail or no remittance information at all, giving small companies little to no insight into the timing and amount of payments. All of this makes it tough to manage cash flow and accurately plan for innovation and growth.
But these challenges and corresponding business risks can be easily avoided, if not eliminated, with the right approach.
Forward-looking businesses are ushering in a new model for operating that can deliver incredible gains in productivity and profits – and fuel larger economic growth. And it’s being driven by business networks. From discovering, connecting and collaborating with buyers, to securing the financing needed to scale and grow their operations, business networks – and the cloud-based applications underlying them – are changing the buyer-seller dynamic – and the way that business gets done. And nowhere is this more evident than in financing.
As volatility and economic uncertainty persist around the globe, the tendency for most organizations is to shore up costs and adopt a myopic approach to laying out cash. But doing so will only lead to missed opportunities. Collaboration is key to navigating through tumultuous times. And business networks make it easier than ever to do.
Take dynamic discounting. Leveraging business networks, buyers can accelerate payments for approved invoices to key suppliers in return for a discount. They earn an immediate (and better) return on their cash than the alternative of simply keeping their earnings in traditional, low-return liquidity vehicles. Their trading partners can then use the cash to fund their daily business needs – and ensure that they’re meeting the buyers’ ongoing demands.
As the gap between low-quality and high-quality borrowers grows, more suppliers are finding it tough to access the capital they need to sustain – much less grow – their operations. By getting paid faster from their largest customers, they are able to better plan operations, invest in other areas of the company, and fund business-critical operations that drive new growth and innovation.
When it comes to dynamic discounting, buyers win as well. Let’s say a buyer proposes a pro-rated one percent discount in exchange for paying a supplier 20-25 days early. They may lose 0.05 to 0.10 percent in interest in doing so, but the discount they receive will result in a return on capital of between 16 percent and 24 percent. This is a far greater gain than the initial sacrifice.
The network effect:
Getting buyers to agree to pay early and sellers to offer a discount might seem like an impossible task. However, business networks and their underlying technology make this initiative surprisingly simple. Powered by and delivered through the cloud, such solutions provide buyers and sellers with all of the tools necessary to fully automate how they offer, negotiate and agree on early payment terms. Buyers can capture discounts at any point between invoice approval and the net due date – and automatically present offers to lock them in. Suppliers can automatically accept offers or control the acceleration of payment on an ad-hoc basis, based on their unique business needs.
Buyers and suppliers who tap into business networks – and leverage tools like dynamic discounting to more effectively collaborate – can not only ensure their mutual health, but help to spark the growth that the global economy so desperately needs.
By leveraging the connectivity and insights of business networks – and the agility of cloud-based technologies within the networks – Chicago-based technology company Mediafly was able to more effectively manage their entire payment cycle. By transacting over a business network, Mediafly was able to fully automate the process of offering, negotiating and agreeing on early payment terms. The business network decreased Mediafly’s quote to settlement process down to 14 days, as opposed to a typical 30-to-90-day span. Cutting this turnaround time by over 50 percent gave the startup access to the capital needed to fund Mediafly’s growth faster than what would be possible (or imaginable) with a traditional financing approach.
Mediafly used this resulting capital to speed their hiring process of engineers – resulting in explosive business growth. Their early capital also enabled them to release a product ahead of schedule, which proved a huge success. Not to mention, as Mediafly’s business grew with increased revenue and employees, the network exposed them to many potential customers – and the company capitalized on this connectivity to pursue new business opportunities.
Mediafly celebrated its 11th anniversary in 2017 – and fully credits the business milestones it achieved and company growth it experienced to automating their payment processes – and offering discounts for early payment over the business network.
By leveraging the power of business networks and the cloud-based solutions within them – startups and small businesses can, like Mediafly, connect to and transact with their customers and partners more effectively and efficiently than ever before and continue to drive innovation and growth to keep their operations – and the rest of the global economy – humming.
A decline in the return on capital employed of globally listed companies over the last decade has been noted in recent EY and PWC reports. This is despite businesses taking an increased focus on balance sheets since the financial crisis in 2008.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?