Magazine article Business Credit

Trade Finance Product Enables Credit Managers to Effectively Manage DSO, Credit Risk and Cash Flow

Magazine article Business Credit

Trade Finance Product Enables Credit Managers to Effectively Manage DSO, Credit Risk and Cash Flow

Article excerpt

There is now an innovative financial solution that improves the working capital and cash flow impact of the accounts payable market. Trade Payables enables credit managers to take control of their accounts receivable turning them into a more efficient source of working capital. Trade Payables financing programs enable both the supplier and their buyer to meet their unique business challenges and achieve their optimum goals--buyers receive extended payment terms on an unsecured basis and suppliers accelerate their cash flow and mitigate credit risk.

A Trade Payables program is an easily assimilated, inexpensive and customizable solution that augments, but does not replace, existing accounts receivables programs. Its ease of use and quick turnaround make it appealing for credit managers to adopt and use. It reduces Days Sales Outstanding (DSO), mitigates credit risk and increases cash flow, while providing buyers with extended terms. The end result is that a Trade Payables program creates a financially stronger supply chain and enhances the buyer and supplier relationship.

In the traditional open-account sales environment, a supplier provides a product or service to a customer who then pays him for the service based on standard payment terms (i.e., net 30, 45, 60, 90 days, etc.). Suppliers wait for payment during this period, which could increase if invoice discrepancies occur. This delay results in the supplier waiting for cash or alternatively financing the receivables through traditional asset-based loans, receivable securitizations, factoring or other vehicles. The Trade Payables program can eliminate that delay:

How It Works

Following the sale of a product or service to the buyer, a buyer issues a draft as payment for an invoice or multiple invoices. The Trade Payable service provider purchases the draft at a discount from the supplier in return for non-recourse payment within two to three business days.

On the due date of the draft, the buyer wires funds to the Trade Payable service provider in return for voiding of the draft. The uncertainty of when payment will occur evaporates.


In today's economy, corporations are forced to work harder at improving balance sheet performance, while increasing working capital. They are also faced with maintaining a delicate balance that is inherent in trying to reduce DSO while simultaneously working to increase cash flow and appease customers who desire extended credit terms and increased credit lines. Credit managers are challenged to identify innovative and alternative methods of mitigating credit risk, including looking outside the traditional accounts receivables arena to do so.

In fact, the implementation of a Trade Payables program can effectively help credit managers to meet all of their credit and financial objectives. There are a number of important benefits derived from the program.

Supplier Benefits

As suppliers are aware, maintaining consistent cash flow requires juggling nearly every facet of a business, from staying current with accounts receivable to servicing customer requests to increase lines of credit, while maintaining exposure and concentration limitations. The essence of successful cash flow management is regulating the money flowing in and out of a business. Increasing cash flow reduces the amount of working capital needed to support the given level of the business. An increased consistent cash flow also creates a predictable business pattern, making it easier to plan and budget for future growth.

The Trade Payables program significantly reduces DSO from the traditional net of 30, 60, 90 days to now two or three days. Suppliers participating in a Trade Payables program know when their approved invoices are scheduled for payment, allowing them to more accurately predict their cash receipts cycle. This becomes particularly obvious when juxtaposed with a situation when it can take months before a problematic invoice is detected and resolved between the supplier and the buyer, further tying up cash that suppliers could be using to fund operations. …

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