Resources | Dynamic Discounting | 27 February 2023

Traditional Early Payments vs. On-Demand Early Payments: What’s the Difference?

On-demand solutions are transforming traditional early payment strategies to make working capital access more affordable and equitable for suppliers.

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On-demand solutions are transforming traditional early payment strategies to make working capital access more affordable and equitable for suppliers.

If you’re a small to mid-sized business, the following scenario might sound familiar: Your customers are taking longer to pay their invoices, some with terms as long as 60, 90 or even 120 days. As you wait for invoices to clear accounts receivable, your business is left without the working capital needed to grow and may even struggle to maintain operations. You’ve considered funding sources such as working capital loans and lines of credit, but the fees are high and it will take time for your business to qualify.

Thankfully, early payment solutions provide an accessible alternative to improving cash flow and addressing lengthy payment periods. These solutions follow the same basic principle — ensuring that your invoices get paid faster — either by offering invoice discounts or using a third-party factor to advance the funds. Using early payments can help you build working capital and grow your business.

But not all early payment strategies are created equal. Traditional approaches typically let customers and factors determine the discounts, fees and timelines associated with early payment. In contrast, more modern, on-demand solutions let you decide when to get paid early and at what cost.

What’s the difference between traditional and on-demand early payment options, and how can you start using a more flexible solution?

What are traditional early payments?

Traditionally, early payments are achieved in one of two ways:

  1. An invoice discount. You give your customer an option to pay early in exchange for an invoice discount. This is often presented as an addition to your invoices’ credit terms. Traditional early payment discounts are static, offering a fixed discount rate if the customer pays within a prescribed period. For example, early payment offers are often expressed as “2/10, net 30,” meaning that if the customer pays within 10 days, they receive a 2% discount. Otherwise, they must pay the full amount within 30 days.
  2. Invoice factoring. You sign an agreement with a factoring company (a factor) to receive funds in advance of your customer’s payment terms. The factor buys your outstanding invoices outright, usually at 70% to 90% of their total value. After your customer pays the factor, the factor gives you the remaining balance minus factoring fees (typically 1% to 5%, depending on how long the invoice was outstanding).

With static discounts, you fund early payment; with factoring, a third party does. Both of these options help you get paid faster to improve cash flow and grow your business. However, they also come with a few drawbacks. Extending early payment options to your customers lets them decide when to pay early — if they choose to at all. For suppliers, this approach is unpredictable and offers less control over accounts receivable.

Factoring agreements also have set fees and typically require you to factor all approved invoices. Plus, factoring fees are often more expensive than early payment discounts, and factors manage the payment component of your customer relationships.

What are on-demand early payments?

A newer approach gives suppliers more flexibility and control over early payment processes. Enter: on-demand early payments.

On-demand early payments enable you, the supplier, to choose which invoices to request early payment on and determine your discount rate. Instead of involving a third-party factor or offering take-it-or-leave-it discounts to customers, this model uses an early payment programme that facilitates early payments agreeable to both parties. In simple terms, both you and your customers opt in to an early payment programme, and each party independently sets a desired discount rate on outstanding invoices.

One advantage of using this technology is that it can automatically adjust the discount rate based on how early a customer pays. This offers a more flexible early payment window than static discounts. The result is a dynamic discount — the sooner the customer pays, the bigger the discount.

On-demand early payment solutions such as C2FO’s go one step further, using supply and demand data, in addition to the number of days paid early, to determine discount rates. Combined, this has two benefits: It incentivises your customers to pay sooner and often reduces discount costs.

C2FO offers an on-demand early payment solution

To recap, on-demand early payments put you in control of accounts receivable, allowing you to determine which invoices to accelerate and at what discount rate. However, you might still be wondering: What does this look like in practice? Here’s how it works with C2FO’s reliable on-demand early payment solution:

  • As a supplier, you activate a free account and check which of your customers use C2FO’s Early Payment platform. A large network of enterprise buyers (including 74 Fortune 100 companies) already implement early payment through C2FO’s platform.

  • C2FO’s platform allows you to review outstanding invoices, which are approved and uploaded by participating buyers. Your customers (the buyers) also set a target rate of return for early payment on these invoices.

  • You choose which invoices to accelerate and set a discount rate — either using a C2FO-suggested rate or by naming your own rate manually.

  • C2FO’s algorithm compares supply and demand with each party’s desired discount rate and approves early payment when the terms benefit both you and your customer.

  • If approved, the customer pays you directly with the new discounted amount and payment date.

C2FO offers an on-demand solution to help businesses access the capital they need to grow — and at a lower cost and on more equitable terms than traditional early payment processes.

The takeaway

Traditional early payment methods such as static discounts and factoring have helped suppliers increase working capital for years. However, some of the drawbacks associated with these options — such as high costs, inflexible terms and lack of supplier control — have prompted the development of on-demand early payments.

On-demand solutions give suppliers like you more flexibility when it comes to early payment requests and costs, using an online platform to facilitate a win-win process for you and your customers. This on-demand approach is a proven working capital solution that is already used by many small to mid-sized businesses, helping them navigate pandemic recovery, growth and economic uncertainties such as inflation.

The best part? On-demand early payments are already available to you if your customers use C2FO’s platform. Log in or register now to see if you have any outstanding invoices eligible for early payment.

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