Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Strategic Prepayments to Save Millions
Transcript
- Lucas: Most procurement teams spend their energy trying to stretch payment terms — push net 30 to net 60, net 60 to net 90, squeeze every day of float they can get. That's the conventional wisdom. But there's a countermove that a surprising number of buyers overlook, and it's the opposite: paying your suppliers early. Luna: Paying early? That sounds like you're giving up free financing. Why would anyone do that voluntarily? Lucas: Because if you structure it right, you can get a discount that beats what you'd earn on that cash sitting in a money market fund. There's a mid-sized manufacturer I've been following — let's call them Precision Components, about $800 million in annual revenue. They buy a lot of specialty steel and machined parts from about 40 core suppliers. Luna: And they were on standard terms, I assume? Net 60? Lucas: Exactly. Net 60 across the board. Then their CFO noticed something: a few of the smaller suppliers were consistently paying a factoring company — selling their receivables at a discount of roughly 2 to 3 percent per month just to get cash faster. That's a huge cost, and it gets priced into the parts eventually. So the procurement team went to their top 10 suppliers and offered a deal: we'll pay you in 10 days instead of 60, and in exchange, you give us a 4 percent discount on every invoice. Luna: Four percent — that's a big ask. Did any of them push back? Lucas: A few did. They ran the math and realized 4 percent on net 10 versus 60 days — the implied annualized rate is something like 29 percent. That's an expensive loan from the supplier's perspective. But for suppliers who were already paying 2 to 3 percent a month to factors, this was actually cheaper. Plus, they got the certainty of predictable cash flow. So nine out of the ten agreed. Luna: And the buyer's side — what did Precision Components get out of it? A 4 percent discount on what, $50 million in annual spend? Lucas: Close. Their total spend with those 10 suppliers was about $60 million a year. Four percent of that is $2.4 million in direct savings. Now, they did have to free up about $10 million in additional working capital to accelerate payments — they were essentially paying earlier than they had to. But their CFO calculated the internal rate of return on that $10 million at about 24 percent, because the savings come year after year. Luna: Twenty-four percent return — that's better than almost any operational improvement project. But it only works if you have the cash. Lucas: That's the critical qualifier. This strategy is for companies with strong balance sheets and positive cash flow. If you're already borrowing on a revolving credit facility at 6 or 7 percent, the math flips. But if you have idle cash earning 4.5 percent in a money market fund, swapping that for a 4 percent discount on payables still nets you a gain — plus you strengthen supplier relationships. Luna: And those relationships — I imagine the suppliers who got early payments were more willing to prioritize Precision Components during tight supply situations? Lucas: Exactly what happened. About 18 months into the program, there was a steel shortage — one of the suppliers had to ration output. They gave Precision Components 100 percent of their requested volume, while other customers got cut. The supplier later said it was because Precision had 'partnered' with them on cash flow. That kind of goodwill is hard to price, but it's real. Luna: So what's the procurement team's role here? This sounds as much like a treasury decision as a sourcing one. Lucas: It's absolutely cross-functional. The procurement team at Precision Components worked with treasury to model the cash flow impact, then with the CFO to get sign-off. But procurement owned the supplier conversations — they knew which suppliers were factoring, which ones had tight margins, which ones would value predictability. That relationship intel is something treasury doesn't have. Luna: Were there any categories where this didn't work? I'm thinking of large commodity suppliers who have their own low-cost financing. Lucas: Right. For a giant steel mill or a multinational chemical company, paying early is irrelevant — they have better access to capital than you do. Precision Components targeted smaller, specialized suppliers. Also, they avoided offering the deal to suppliers of non-critical items where switching costs are low. You don't want to lock in a relationship that you might want to exit. Luna: And the discount rate — is 4 percent the magic number? Or does it vary? Lucas: It varies. Some companies use a standard dynamic discounting platform — think of it like an automated exchange. The buyer offers, say, a 2 percent discount for payment within 10 days, and the supplier can choose to accept or not. But Precision Components negotiated bilaterally because they wanted a consistent program. They actually benchmarked their suppliers' cost of factoring to figure out the right rate. Luna: So they used the supplier's own pain point as the negotiation lever. That's smart procurement. Lucas: It's the kind of win-win that good procurement does. The supplier gets cheaper financing than the factoring market. The buyer gets a reliable discount and stronger supply assurance. And the relationship shifts from transactional to strategic. Luna: I want to ask about the downside. What if the supplier becomes dependent on early payment and then the buyer has a cash crunch? You've effectively created a dependency. Lucas: That's a real risk. Precision Components mitigated it by capping the program to a subset of suppliers and making it a voluntary annual agreement, not a permanent commitment. They also built a clause that allowed them to revert to standard terms with 30 days notice. And treasury kept a liquidity buffer specifically for this program. Luna: So it's not something you set and forget. You have to monitor your own cash position continuously. Lucas: Exactly. The treasurer now reviews the program quarterly. If their cash position tightens, they can pause new early payments until liquidity improves. But in practice, the savings have been consistent enough that they've expanded the program to 15 suppliers now. Luna: Fifteen suppliers out of forty — so they're still selective. I wonder if there's a way to scale this further, maybe using a third-party platform that automates the discounting. Lucas: There are platforms — C2FO, Taulia, PrimeRevenue — that do exactly this. They create a marketplace where suppliers can bid for early payment at a discount they choose. Buyers see offers and accept the ones that meet their return threshold. It's more flexible than a fixed 4 percent, but it requires systems integration. Luna: And presumably the buyer still needs a strong balance sheet to participate. The platform doesn't create cash. Lucas: Right. The platform is just a mechanism. The cash has to come from somewhere. But for companies with strong cash generation, it's a way to turn a liability — accounts payable — into a profit center. Luna: Speaking of profit centers, this episode is a good reminder that procurement can directly contribute to the bottom line beyond cost avoidance. It's not just about negotiating lower prices; it's about creatively using your balance sheet. Lucas: And that's exactly the kind of thinking we try to explore on this show. If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Even small contributions help us keep the podcast ad-free and focused on the substance. Lucas: So back to early payment — one more angle I want to touch on. Some companies are now using early payment programs specifically for sustainability goals. They offer faster payment to suppliers who meet certain ESG criteria, like carbon reduction targets. Luna: That's clever. It ties financial incentive to sustainability performance. Have you seen that in practice? Lucas: Yes. A large European retailer piloted a program where suppliers with a verified science-based emissions target get payment in 15 days instead of 60. The discount is smaller — around 1.5 percent — but the supplier gets the cash flow benefit. The retailer reports that supplier engagement on sustainability jumped significantly because the incentive was tangible and immediate. Luna: So the same tool — early payment — can be repurposed for different objectives: cost savings, supply assurance, sustainability. Lucas: Exactly. The mechanism is simple. The strategy is in how you target it and what you ask for in return. For Precision Components, it was a straight discount. For the retailer, it was a sustainability goal. The core insight is the same: your payment terms are a lever, not just a default. Luna: And if you're a procurement leader listening, what's the first step? Do you need a platform, or can you start with a spreadsheet? Lucas: Start with analysis. Pull your top 20 suppliers by spend. Map their payment terms. Check if any of them use factoring — you can sometimes see that in their financial statements or through a credit report. Then have a conversation with your CFO about your cash position. If you've got excess cash earning 4 percent, you have room to offer early payment. Pick one supplier, negotiate a pilot, measure the savings, and then scale. Luna: That's a concrete action plan. One supplier, one pilot. Lucas: And if the math works, you've just found a multi-million dollar savings stream that most of your competitors are ignoring.