Companies of all sizes tend to face challenges when it comes to managing working capital.
“Suppliers want to be paid quickly for services, but companies want to pay slower to keep more cash on hand,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank. “The interests of both parties need to be considered as part of the business relationship.”
Smart Business spoke with Altman about cash flow management and payment options that benefit both payers and suppliers.
What are some common payment methods?
The most common payment method is issuing checks. They generally require little more than the recipient’s mailing address in order to effect payment. Checks typically include a check stub that provides remittance detail for the recipient to close out their receivable, but the manual data entry process to record the check stub detail is laborious and subject to error.
ACH and wire transfers require the recipient’s bank account information to complete the transaction. ACH has no easy way to transfer remittance information to the supplier. Wire payments have the same issue and they’re expensive to process, so it’s often not ideal for payers.
Commercial cards are also relatively simple for the payer and receiver once the receiver is capable of processing card payments, however there are fees incurred by the receiver to do so. Detailed remittance information is provided with the card transaction. Payers are willing to send commercial card payments to their suppliers earlier than any other method since they do not need to actually fund those payments until their monthly program cycle ends. Those faster payments make the processing fees worth it for many suppliers.
How does each payment method stand up to fraud?
If checks are intercepted or even momentarily viewed, fraudsters can create fraudulent checks and use them for their own purposes. Seventy percent of payments fraud occurs using checks.
There are multiple methods for fraudsters to gain access to online ACH and wire transfer credentials and then move money from company accounts.
Commercial cards, particularly virtual cards, are the most secure. Payments are made through one-time use cards that are allocated for a specific supplier in a specific amount. It’s very hard, if not impossible, for fraudsters to intercept.
What are the costs of these different methods of payments?
Typically, the cost of a wire transfer for the payer is $10 to $20, ACH is about 25 cents and checks cost between $1 and $3. With commercial cards, the cost primarily falls to the recipient. Commercial cards have the advantage of a revenue share program that comes back to the payer. These rebates can be monthly, with a percentage of dollars put on the card program coming back to the payer in cash. There are often annual bonus rebates if the spending volume crosses a predetermined threshold.
Commercial cards also offer a use of funds gain for the payer. Payment is made in a day, satisfying the supplier, while typically giving the payer a 30-day period to pay the bank.
Conversely, funds transferred by wire are gone the same day, ACH moves funds one day after a transaction is submitted, and checks have to be funded within three to five days of issue.
What should companies consider as they negotiate payment terms with vendors?
Payment timing is a big factor in these negotiations, as is the impact of competition. Many suppliers see card acceptance as a cost of doing business. There is a supplier enablement component to many commercial card programs where the payer’s bank will contact the supplier on the payer’s behalf to see if they will accept card payments.
While each method of payment offers its own unique advantages, businesses with annual accounts payable volumes of $5 million to $500 million may ultimately find it in their best interest to maximize the use of commercial card for payments, given that it’s the most cost effective and efficient form of payment for both parties and is the most resistant to fraud.
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