Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How One Supplier Cut Net-60 to Net-10 With a Simple Rate Swap
Transcript
- Lucas: There's this auto parts supplier in Dayton, Ohio — about a dozen employees, does custom gaskets for heavy equipment. Their biggest customer, a regional distributor, had them on net-60. And the owner just accepted it because that's how it had always been. Luna: Classic small business trap: the customer with the most leverage sets the terms. Lucas: Right. But this owner stumbled onto something. He didn't ask for shorter terms — he offered a swap. He said, 'If you pay me in 10 days, I'll give you a 1.5 percent discount.' That's not unusual. What's unusual is how he funded it. Luna: He didn't just eat the discount out of margin? Lucas: He couldn't. Margins on custom gaskets are thin — maybe 12 percent. A 1.5 percent hit on every invoice would wipe out more than 10 percent of his profit. So he went to a third-party early-payment platform. The platform pays him in 10 days, minus a small fee — say 0.8 percent. Then the platform waits the full 60 days to collect from the customer. The customer still gets the 1.5 percent discount from the original invoice total, but the platform keeps the spread. Luna: So the platform earns 0.7 percent per invoice — 1.5 minus 0.8 — and the supplier gets paid in 10 days without sacrificing margin. Lucas: Exactly. And here's the number that made me stop: the annualized rate on that 0.8 percent fee for 50 days of early payment is about 5.8 percent. That's cheaper than most business credit cards and way cheaper than factoring, which can run 15 to 25 percent annualized. Luna: But the customer's discount — 1.5 percent for paying 50 days early — that annualizes to what, around 11 percent? Lucas: Closer to 11 percent, yes. But the customer doesn't think in annualized terms. They see a flat 1.5 percent off the invoice. For a $50,000 order, that's $750. The customer's finance team says, 'We can borrow at 6 percent, so paying early to save 1.5 percent flat is worth it if we have the cash.' Luna: But what if the customer is also cash-constrained? Then they can't take the discount, and the supplier is back to waiting 60 days. Lucas: That's where the platform helps again. Some platforms let the customer choose to extend their own payment terms — say, pay in 90 days instead of 60 — in exchange for a small fee. The platform then pays the supplier in 10 days regardless. So the supplier gets predictability, the customer gets flexibility, and the platform takes the risk. Luna: So the supplier's DSO drops from 52 days to maybe 11 days. That changes their whole cash cycle. They can buy raw materials sooner, maybe even offer their own early-payment discounts to their suppliers. Lucas: That's exactly what happened. The owner told me his DSO went from 52 to 11 days in three months. His cash conversion cycle went from 45 days positive to 8 days positive. He stopped using his bank line of credit entirely — saved about $4,000 a year in interest. Luna: But not every supplier can do this. The platform charges a fee based on invoice size. If your average invoice is $500, the fee might eat the whole benefit. Lucas: True. This particular supplier's average invoice was around $3,800. The platform's minimum was $1,000. So it worked. But if you're a freelancer sending $200 invoices, factoring or a credit card might still be your best bet. The key is the invoice size threshold — typically $1,000 to $2,500 for most platforms. Luna: So for a small business with a few large customers, this is a no-brainer. But for a business with hundreds of small invoices, it's not. Lucas: Right. The platform model works best when you have concentration. This supplier had three customers making up 80 percent of revenue. So they only had to onboard those three. The platform handled the rest. Luna: What about the customer's perspective? Why would a large distributor agree to this? They could just tell the supplier to factor their invoices. Lucas: Because factoring sends a signal. If a supplier factors, the customer knows the supplier is cash-strapped. That weakens their negotiating position. With a platform, the supplier isn't borrowing against receivables — they're selling them at a discount, but the customer doesn't see that. The customer just sees an early-payment discount offer. It's cleaner. Luna: And the customer's financials don't show debt — they show a trade discount taken. That's a win for their procurement metrics. Lucas: Exactly. So the structure realigns incentives. The supplier gets cash fast, the customer gets a discount, the platform makes a spread. Everyone wins — as long as the invoice size is above that threshold. Luna: I want to dig into the numbers a bit more. The supplier's fee was 0.8 percent for 50 days early. That's an effective annual rate of about 5.8 percent. But what if the customer pays late — say 70 days? Then the platform holds the money for 60 days, and the fee annualizes lower. Lucas: Right. The platform's fee is typically a flat percentage of the invoice, regardless of when the customer actually pays. So if the customer pays early, the platform's annualized return is higher. If the customer pays late, it's lower. But the platform builds in a buffer — they only approve suppliers with reliable customers. So the risk is manageable. Luna: So the supplier's effective cost of capital through the platform is around 5.8 percent. Compare that to a typical small business credit card at 18 percent, or a bank loan at 8 to 12 percent. It's cheaper. Lucas: And it's not debt. There's no interest accrual, no personal guarantee. The supplier is selling an asset — the receivable — at a discount. Their balance sheet gets cleaner. Their debt to equity ratio improves. Luna: That makes it easier to get a term loan later if they need one. Lucas: Exactly. So the whole thing is a liquidity hack disguised as a discount. And it's been around for a while — companies like C2FO and Taulia have done this for large corporations. But now platforms are targeting the lower middle market. Luna: The Dayton supplier is a good case study. But what about a small business with many small customers? They can't onboard each one to a platform. Lucas: Then they might be better off with a different approach — like offering a 2 percent discount for payment within 10 days, funded out of their own cash if they have it. But that only works if their margins are high enough. For a custom gasket maker, margins are too thin. So the platform is the only option. Luna: It's a rate swap. The supplier swaps the uncertainty of 60-day terms for a known cost — the platform fee. And the customer swaps a known discount for potential liquidity gain. Lucas: That's exactly how I think of it. A rate swap. And it's one of the few financial products where the small business actually has the upper hand in pricing — because the platform competes on fee, and the supplier can choose the cheapest one. Luna: So what's the takeaway for a small business owner listening? If your average invoice is above $1,000 and you have a few large customers, look into early-payment platforms. Don't just accept net-60. Lucas: And don't assume factoring is the only option. Factoring tells the world you're desperate. This approach tells the customer you're offering a deal. It's a completely different signal. Luna: Speaking of offering value — if today's conversation moved your thinking forward in some small way, that's exactly why we do this. These shows stay ad-free because listeners who find them useful occasionally chip in at buy me a coffee dot com slash fexingo. No pressure, just a quiet way to keep the conversations going. Lucas: Yeah. It's a small gesture that makes a big difference for us. And we appreciate every single one. Luna: Back to the numbers — I want to run a quick comparison. Suppose a supplier has $100,000 in monthly invoices, all net-60. Using a platform at 0.8 percent fee, they pay $800 per month to get paid in 10 days. That's $9,600 a year. But they avoid a $50,000 line of credit at 8 percent — that's $4,000 in interest. Plus they might get a better price from their own suppliers by paying them early. Lucas: So the net cost is $5,600 a year. But they also eliminate the hassle of chasing payments. The owner told me he spent about 10 hours a week on collections. He redirected that to sales. His revenue went up 15 percent in six months. Luna: So the platform paid for itself just in time saved. That's the real ROI. Lucas: Exactly. So if you're a small business owner listening, look at your largest customer. Check their payment history. If they average 55 days, run the numbers on a platform. It might be the simplest change you make this year. Luna: And if you try it, let us know how it goes. We'd love to feature your story on a future episode. Lucas: Absolutely. That's it for this episode of Cash Flow Conversations with Fexingo. We'll be back with another practical angle on working capital. Until then, keep your cash flowing.