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The challenging trading conditions of the last two and a half years are encouraging businesses to explore the cost and risks associated with trade credit. Decision makers are beginning to focus on longer-term, more cost-effective, and sustainable solutions to the challenge of trade credit. Business debt and liquidity have come into ever greater focus, after all, liquidity is the lifeblood of business, a truism that becomes even more apparent in periods of economic stress.
For many businesses trade credit provides an essential source of financing. It can also be the easiest and most convenient form of loan available, meaning that trade credit can essentially act like a 0% loan on the balance sheet. What’s more when macroeconomics creates adverse trading conditions the amount of trade credit in use increases quickly becoming an easy substitute for bank loans.[1] However, while trade credit can have important, well-documented, advantages to the supplier it comes with significant risk, cost, and the real potential to impact negatively on liquidity.
The cost-benefit analysis and justification for faster payments using alternatives such as digital escrow as a replacement to trade credit are of course likely to be dependent largely on the business model and the overall costs of trade credit. However, deploying liquidity generated from real-time payment on delivery to support faster delivery, fund group companies with their working capital requirements, or make just-in-time investments is becoming pivotal. For some businesses the most pressing and critical component of liquidity, along with the need for improving working capital management with digital escrow, is the impact of rising interest rates on the cost of servicing and refinancing debt added to corporate balance sheets when money was freely available.
Offering a different approach, platforms such as YataPay Secure offer digital escrows which are cost-effective, time efficient, and more flexible than existing supply chain finance options to liquidity. It is an added bonus that the status of the transaction can be tracked by both the supplier and the beneficiary can track the transaction
Furthermore, traditional tools which offer trade credit protection such as trade credit insurance or letters of credit are cumbersome, expensive, and lack responsiveness in comparison with the digital escrows offered by the new fintech companies. There are many reasons why firms are considering using escrow payment services, from reducing their fixed costs to minimising the potential for fraud which it is suggested costs UK businesses as much as £12bn per year through payments to securing liquidity by speeding up payment and ensuring frictionless, immediate settlement on delivery of goods and services.
[1] Source: Mateut, Bougheas, & Mizen, 2006