Quick - who is the largest lender to businesses in the country? If your answer is: Bank of America, CitiBank, JP Morgan, Wells Fargo, or one of the other multi-national banks, you would be wrong. What about Hedge Funds? SBA? Goldman Sacks? Nope! Actually, the largest lenders to businesses are the companies themselves that extend credit payment terms to their customers by way of vendor financing. Also, the amount that is being loaned is increasing, not decreasing.
Most every business in every industrialized country depends on vendors providing delayed payment terms of sale. Typically, a vendor will provide a standard 30 days for a buyer to pay for goods. Some provide even longer terms, up to 90 days. There has been a recent trend where buyers are demanding 120 and 180 days to pay for goods and services.
This is how it works: When a vendor sells for example, $10,000 worth of goods to a buyer on net 30 day terms, they are, in essence, loaning a buyer the $10,000 to buy those goods. This is where it gets interesting...
Say a customer buys $10,000 in goods from a seller every 30 days. If the vendor gets paid in 30 days, they will only have $10,000 in loans out to the buyer. If the customer doesn’t pay for 60 days, then the vendor will have $20,000 out to the buyer. If this trend continues to 120 days before the buyer pays for their first order, the seller has a whopping $40,000 out in vendor financing to the buyer. That’s one big loan! And that was just one $10,000 transaction.
The US economy is just shy of twenty trillion dollars with a bulk of that being for the sale of goods and services between businesses on credit terms. Billions of these sales are happening every year between companies which are on delayed payment terms of 30, 60 or 90 days.
This doesn’t mean vendors don’t get loans to help with their vendor financing. They do by way of accounts receivable financing or factoring. Both of these methods will provide up to 80% of eligible collateral as a cash flow loan in order to help a vendor sell his goods and services. This still means that a vendor needs to carry the other 20% themselves. Should an invoice go over 90 days, the vendor could be required to carry the full amount of the sale.
Even though a vendor might get their accounts receivables financed, the buyer is still getting a free loan from the seller which means the seller has to borrow money themselves to finance the transaction. Just think, a seller of goods has to borrow to loan the money to a buyer to buy its goods. This makes for a very strange situation.
There is a change coming to this fairly ancient sales cycle. It’s called “Quick Pay.”
Companies like AeroPay Express are entering the market to offer vendors a solution. Vendors have the ability to take a small discount on their sales and in exchange they will get paid immediately when they ship the goods. It’s a simple system really. Instead of a vendor borrowing money to lend to the buyer, AeroPay Express provides the credit to the buyer whereby AeroPay Express then takes the role of the lender.
If you are tired of being the banker to your customers, take a minute, and give AeroPay Express a call.