The Covid-19 crisis has heralded an unprecedented increase in the need for working capital financing (WCF). As such, payment platforms that enable invoice payments with credit cards have seen a boom in corporate use since March 2020. While SMEs have been struggling to make ends meet, corporations have cautiously drawn down on available credit facilities creating a cash cushion for future use.
Drawdowns such as these carry a cost that could largely be avoided if the facilities could be credit-card based, and thus not as susceptible to inducing long-term and interest-bearing debt. Treasurers and procurement heads alike will testify to the low card acceptance in their respective spaces. However, there are flexible payment tools available today enabling card-based payments in a number of arenas.
The credit card industry has been tasked with increasing card acceptance over the past 40 years. While succeeding in consumer-facing businesses, driven by customer demand, acceptance among B2B suppliers has been lacking overall. The industry quotes acceptance levels of 10-20% in the B2B space. Increasing card acceptance in this space has been naturally burdensome since a high proportion of B2B suppliers already have low margins and do not want to add on the additional cost that accepting cards entails.
Changing the game
The revised Payment Services Directive 2 (PSD2) put a cap on consumer issuer rates, thus creating a focus towards commercial issuing, particularly for meeting travel and entertainment (T&E) expenses. The pandemic, however, significantly reduced the T&E proportion, forcing a strategic shift among SME and corporate issuers. From an issuing bank’s perspective, providing credit on a credit card (compared with other types of lending) can reduce risk since the credit cycles are shorter, usually around 45-90 days. Additionally, the issuing bank can put restrictions on which suppliers can be paid using a credit card.
Card-enabling invoice payments can come in many forms even though the fundamentals remain the same. For ease of reference they can be divided into two parts: WCF, which card-enables the strategic spend of a company using a high limit facility tied to a credit card, and tail-end spend, where companies use existing procurement cards to settle invoices that were previously not payable by card.
A scalable WCF solution
A card-based WCF solution enables corporate clients to utilise cards as a flexible and ready-to-use option. Benefits include no fixed or commitment fees and generally there are balance sheet benefits – the accounts payable (A/P) supplier invoice item is replaced with a credit card balance A/P item, thus maintaining cash balances and reducing working capital. Card-based WCF lines of credit can be vast, and individual invoices worth tens of millions of dollars are not rare.
Solutions allow for both a buyer- and supplier-funded model. This means that a corporate can, on the same platform, choose for which payments they want to bear the costs and for which payments the supplier will bear the costs (in agreement with the supplier). They can do so dynamically and also choose to share the cost. The key point is to agree as to which party will pay for the additional liquidity.
Corporates can also use platforms such as Billhop to pay tail-end spend suppliers (i.e. low-value, ad hoc payments to the long tail of suppliers). By using solutions enabling card-based invoice payments for tail-end spend, corporates can gain substantial internal process efficiencies and control by consolidating spend onto one platform.
In short, active management of a company’s card programme can bring tremendous benefits. Savvy corporates are increasingly realising this, and the pandemic is fuelling further growth in this market as the focus on cost and process efficiencies intensifies.