The hidden costs of managing B2B trade credit in-house

B2B trade credit—or simply trade credit—is an agreement where business customers buy goods upfront without cash and pay at a later date. It’s a popular payment method for B2B customers. In fact, 80% of B2B payments are executed via check, cash or ACH through trade credit. Credit card transactions represent only 6.7%.

Why is it so popular? It helps B2B customers extend their purchasing power and cash flow management. It provides them flexibility in billing and payment format, as well as detailed billing information for cost allocation and management. This also makes it a useful tool for attracting and retaining customers.

But handling B2B trade credit in-house comes with a number of costs. Some might seem obvious—such as having less cash on hand—while others are less visible. In reality, the cost of managing trade credit in-house is spread across different corners of an organization and is unlikely to be neatly tied to a single line on a P&L. Let’s take a look at where those costs may be lurking—and how the right accounts receivable (AR) solution can help keep them under control.

1. Efficiency costs: Personnel is often the most valuable asset in a business. So the often manual, paper-based processes involved in trade credit may not be the best use of their time. Instead of processing credit applications, invoices and payments in-house, finance teams could focus on more strategic initiatives if they have the right AR solution. This creates opportunities for them to improve their skills and focus on more engaging, fulfilling and valuable work.
2. Operational costs: Enterprises managing a trade credit program in-house often turn to credit bureaus for decisioning. They also use various software packages for invoicing, payment processing, account reconciliation and treasury management in the hopes of streamlining the process. However, juggling multiple point solutions adds complexity. These applications also might not share data, meaning staff must transfer information from one app to the next, taking additional time and increasing the risk of error or omission.
3. Working capital costs: According to trade credit insurer Atradius, 55% of all B2B-invoiced sales are overdue. This puts a strain on working capital, which may require a business to borrow. In addition, common early payment terms such as 2/10 Net 30 (2% discount if the invoice is paid within 10 days—otherwise, full payment is due within 30 days) mean AR programs cost businesses money even when customers pay on time.
4. Collection costs: Collections are a common worry among providers of trade credit—and for good reason. Consider that if an invoice goes to collections, a business will only book 50%-75% of its value. Additionally, AR factoring companies typically charge fees at a flat rate ranging from 1% to 5% of the invoice value per month. Additional fees may include service fees, monthly minimum fees and origination fees.
5. Risk costs: Risks associated with trade credit programs come in various forms. These include the risk of transaction fraud and the risk of nonpayment. There’s also the cost of AR insurance premiums–typically 0.01%-0.04% of sales—required to protect receivables. Managing this risk is no easy task either, as customers’ financial situations are fluid. Whereas most organizations set a customer’s credit limit once and only lower it in response to late payments, they should ideally be monitoring creditworthiness on a continual basis.
6. Customer retention costs: B2B customers expect the same convenience they enjoy as B2C customers: speedy credit decisions, paperless billing, easy self-service and electronic payments. If a business is burdening customers with paper bills, statements and check payments, the result will be a negative customer experience that could send them to a competitor. 1 And just as appropriate credit limits can reduce risk, they can also increase sales. A growing customer that is constantly bumping up against its outdated credit limit may similarly limit its purchases.
7. Opportunity costs: Perhaps the most deeply hidden costs are those related to the loss of potential business opportunities. Having cash tied up in an in-house B2B credit program limits working capital. It constrains more strategic business initiatives such as inventory buys, supply chain improvements or other investments.

The solution to hidden costs

Trade credit may seem like a straightforward payment option, but its true cost is easily masked. From staffing inefficiencies to the hidden drain on working capital, these hidden expenses can significantly impact your bottom line and limit your ability to grow.

By implementing the right AR solution, you can streamline processes, automate tasks and gain real-time insights into your credit program. This not only reduces the hidden costs, but also empowers you to optimize your trade credit strategy for maximum efficiency and profitability.

The good news is a scalable, customizable, full-service AR solution from Capital One Trade Credit can help you provide B2B customers with the flexible credit terms and digital tools they need—while providing you with guaranteed cash flow, protection from the risk of fraud and nonpayment, as well as flexible, seamless integration with your workflows to meet your unique business needs.

Ready to take control of your trade credit program? Contact us at tradecredit@capitalone.com, or get more information.