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How to Use 2/10 Net 30 to Get Free Financing

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If you’re a business operator looking for ways to optimize cash flow and boost your company’s financial health, leveraging the 2/10 net 30 payment terms is a smart strategy. Here’s how you can use this technique to secure free financing for your business.

What is 2/10 Net 30?

The 2/10 net 30 payment terms mean that if you pay your invoice within 10 days, you receive a 2% discount. If you don’t take the discount, the full payment is due in 30 days. This can be a great way to save money, but many businesses overlook the potential for using this term strategically to get free financing.

Understanding 2/10 Net 30

2: The discount applied to an early payment

10: The number of days after an invoice has been issued. For example, if an order is delivered on Jan 1st, the 10 days would refer to payment made on or before Jan 11th.

Net 30: The terms provided without a discount. For example, the same order delivered on Jan 1st would be due by Jan 31st at par value.

Note: This is a simple naming convention, but the prices may change. Your vendors may charge a larger discount (say, 3%) for earlier payment or offer a full price beyond 30 days (say, net 45).

Why Do Vendors Offer Discounts

Vendors offer 2/10 net 30 discounts to accelerate their cash flow and reduce the risk of non-payment. By incentivizing early payment, they can receive funds more quickly, which helps in managing their cash more effectively, reducing the need for external financing, and lowering financing costs. Additionally, offering such discounts can strengthen customer relationships, create a competitive advantage, and reduce administrative costs associated with managing accounts receivable. This strategy helps vendors maintain a steady flow of funds, optimize inventory management, and improve overall financial stability.

Step-by-Step Guide to Get Free Financing Using 2/10 Net 30

Using 2/10 net 30 terms with a reverse factoring company allows businesses to secure 10 days of free financing. By negotiating these terms with your vendor, partnering with a reverse factoring company to pay the invoice on the 10th day, and then repaying the factoring company within 30 days, you save the 2% early payment discount while paying the reverse factoring company, typically, 2% or less.

In fact, according to a recent McKinsey & Company report, reverse factoring is one of the fastest growing forms of financing. This strategy boosts your cash balance, enhances liquidity, and creates opportunities for growth, ultimately increasing your business’s enterprise value.

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How to Get Started

1. Negotiate 2/10 Net 30 Terms with Your Vendor:

Discuss the early payment options with your vendor and encourage them to offer 2/10 net 30 terms. This is the foundation of the strategy.

Hint: Your vendor may not immediately offer 2/10 net 30, but they will often take a discount for early payment. Start the conversation by asking your vendor if they take an early pay discount – they may be more open than you think!

2. Work with a Reverse Factoring Company:

Partner with a reverse factoring company that will pay your invoice on the 10th day. By doing this, you take advantage of the 2% discount offered by the vendor.

Reverse factoring companies may charge less than the 2% discount offered to your vendor. Before committing to terms, work with your reverse factoring partner to see if you can pay under 2%.

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Remember, reverse factoring companies may charge less than the 2% discount so be sure to negotiate your offer.

3. Instruct the Reverse Factoring Company to Pay Your Vendor on Day 10.

This process may be manual, but where possible work with a reverse factoring company that utilizes technology to facilitate the process. This is typically in the form of an invoice portal that can help manage your payments and reporting.

Make sure to maintain good communication with your vendor and reverse factoring company. This strategy is dependent on your vendor receiving timely payment and accepting the discount.

4. Pay Back the Reverse Factoring Company on Day 40:

Once the invoice has been paid, you will typically have 30 days to pay back the reverse factoring company. Typically, the fees charged by the reverse factoring company for this service will be around 2%, but may be less.

Hint: It may be worth exploring long payypment options with your reverse factoring company. Many financiers will extend your due date from 30 days to 60 or 90 days for an additional fee, often called a factor rate. Depending on the offer, this may be a good option to pull out cash from your working capital cycle.

Fees charged by the reverse factoring company… will be around 2%, but may be less.

Make sure to negotiate with the lender to drive lowest price.

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Benefits of Reverse Factoring on 2/10 Net 30

1. Free Financing for 10 Days:

By using the reverse factoring company, you effectively get 10 days of free financing. You save the 2% discount and then pay it as a fee to the reverse factoring company without any additional cost.

2. Boost Cash Balance:

This strategy helps you maintain a healthier cash balance, providing more liquidity for day-to-day operations or unexpected expenses.

3. Increase Growth Opportunities:

With improved cash flow, you have more opportunities to invest in growth projects, whether it’s expanding your product line, investing in marketing, or improving infrastructure.

4. Grow Enterprise Value:

Enhanced cash flow and better financial management can lead to an increase in your business’s enterprise value, making it more attractive to investors and stakeholders.

Why Every Business Should Use Reverse Factoring on 2/10 Net 30

This simple yet effective technique allows you to optimize your payment terms, improve cash flow, and get free financing without taking on additional risk. It’s a strategy that every business operator should consider to enhance their financial health and drive growth.

By strategically using 2/10 net 30 terms and partnering with a reverse factoring company, you can turn a standard vendor payment term into a powerful financial tool. Start implementing this technique today and see the positive impact it can have on your business’s financial stability and growth potential.

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What is Reverse Factoring and How Wholesalers are Utilizing

Introduction to Reverse Factoring

In the evolving landscape of supply chain finance, reverse factoring is emerging as a transformative solution. Particularly within the wholesale business space, this financial tool is gaining traction for its ability to optimize cash flow, reduce credit risk, and strengthen supplier relationships. This article delves into the details of reverse factoring, its operational mechanics, and the compelling reasons behind its rapid adoption across many sector.

What is Reverse Factoring?

Reverse factoring, also known as supply chain financing, is a financial solution where a third-party financier, typically a bank or a specialized financial institution, facilitates early payment to suppliers on behalf of the buyer. Unlike traditional factoring where suppliers seek financing against their receivables, reverse factoring is initiated by the buyer to ensure their suppliers get paid faster. This shift in approach provides significant benefits to both parties involved in the transaction.

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How Reverse Factoring Works: A Step-by-Step Guide

1. Agreement Setup: The buyer begins by entering into an agreement with a financial institution to set up a reverse factoring program. This may be through an online application process, a bank due diligence questionnaire, or for certain embedded lenders, a one click approval.

2. Invoice Approval: The supplier delivers goods or services to the buyer and submits the corresponding invoice for approval. This may occur on a one-time or ongoing basis. It is important to work with your reverse factoring company to clarify which invoices will qualify for financing as certain invoices such as utilities, payroll, or other service-related expenses typically are unfundable.

3. Buyer Approval: The buyer verifies and approves the invoice, committing to pay the financial institution on the agreed-upon date. It is important to understand the fees your are paying at the time of approval.

Pricing: reverse factoring companies often charge a processing fee (usually 1% or less) and a factoring or financing fee.

4. Financier Payment: Upon approval, the financial institution pays the supplier the invoice amount, often at a discounted rate, before the invoice’s due date.

Note: make sure that your vendor is made aware that they will receive payment from a third party. In many cases, your reverse factoring provider will send automated emails with details of the invoice description. It is important to verify the financier payment process to ensure smooth supplier relationships.

5. Buyer Payment: The buyer then pays the financial institution the full invoice amount on the new due date. This may be the original due date or, in many cases, a delayed due date.

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Example of Reverse Factoring in Action

To illustrate how reverse factoring works, let’s consider a practical example involving a buyer named ChemShop Co., a vendor named Plastics Inc., and a financier named Lendica.

  1. Invoice Issuance and Approval

• March 21st: Plastics Inc. delivers a shipment of raw materials to ChemShop Co. and issues an invoice for $10,000, due on March 31st.

• March 21st: ChemShop Co. approves the invoice and confirms the payment terms with Plastics Inc.

2. Initiation of Reverse Factoring

• March 22nd: ChemShop Co. initiates a reverse factoring arrangement with Lendica, a financial institution specializing in supply chain financing. ChemShop agrees to terms provided by Lendica, 1% processing fee a 1.5% financing fee with payment made on April 30th.

3. Payment to Supplier

• March 31st: Lendica, acting on behalf of ChemShop Co., pays Plastics Inc. the full invoice amount of $10,000. This ensures that Plastics Inc. receives the payment on the due date without delay.

4. Fee Charged to Buyer

• April 1st: Lendica charges ChemShop Co. a fee for the reverse factoring service. In this case, the fee is $100, or 1% of the invoice amount.

5. Repayment by Buyer

• April 30th: ChemShop Co. repays Lendica the total amount of $10,150. This includes the original invoice amount of $10,000 plus an additional fee of $150 (1.5% of the invoice amount for the 30-day period).

Why Reverse Factoring Works for Wholesalers

Wholesalers, especially those operating in a sector marked by complex supply chains and stringent payment terms, can reap substantial benefits from reverse factoring. Here’s how:

1. Improved Cash Flow: Reverse factoring ensures that suppliers receive payments promptly, significantly improving their cash flow. This is particularly beneficial in industries where large working capital outlays are common.

2. Reduced Credit Risk: By leveraging the buyer’s creditworthiness, suppliers can access financing at more favorable terms, reducing their credit risk.

3. Stronger Supplier Relationships: Prompt payments foster better relationships with suppliers, ensuring a more reliable and collaborative supply chain.

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Build strong vendor relationships by consistently paying your bills early or on time.

4. Cost Savings: Suppliers often offer discounts for early payments. By using reverse factoring, buyers can capitalize on these discounts, leading to cost savings.

5. Enhanced Operational Efficiency: The automated nature of reverse factoring streamlines the payment process, reducing administrative burdens and operational inefficiencies.

Reverse Factoring: The Fastest Growing Form of Factoring

Recent studies, including those by McKinsey & Company, highlight the exponential growth of reverse factoring as a preferred financing tool. McKinsey reports that the global market for reverse factoring is expanding rapidly, driven by its proven benefits in enhancing liquidity and optimizing working capital management.

Evidence from McKinsey & Company

McKinsey’s analysis underscores several factors contributing to the swift adoption of reverse factoring:

• Technological Advancements: Innovations in financial technology have made reverse factoring more accessible and efficient.

• Market Demand: The increasing need for liquidity and financial stability in volatile markets has propelled the demand for reverse factoring.

• Regulatory Support: Favorable regulatory frameworks in various regions have facilitated the growth of reverse factoring programs.

Reverse factoring market is growing at 15-20%.

The 2020 McKinsey Global Payments Report

Review: According to a McKinsey & Company study, the Reverse Factoring market is growing at 15-20%.

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Conclusion: Why Reverse Factoring is Ideal for Wholesalers

Wholesaler businesses, characterized by their capital-intensive nature and complex supply chains, stands to gain immensely from reverse factoring. Here’s why:

1. Capital Intensity: Wholesalers often deal with substantial working capital expenditures. Reverse factoring provides a reliable source of liquidity, enabling them to manage these costs more effectively.

2. Supply Chain Complexity: With numerous suppliers and extended payment terms, reverse factoring helps wholesalers maintain a smooth flow of operations by ensuring timely payments.

3. Market Volatility: Many industries are subject to price fluctuations and demand variability. Reverse factoring offers financial stability, allowing distributors to navigate market volatility with greater confidence.

4. Global Trade: As many wholesalers operate globally, reverse factoring facilitates smoother international transactions by mitigating currency and credit risks.

5. Sustainability Goals: By ensuring suppliers are paid promptly, reverse factoring contributes to more sustainable and resilient supply chains, aligning with the broader sustainability goals of many companies.

Conclusion

Reverse factoring is revolutionizing the way wholesalers manage their finances and supply chains. By offering improved cash flow, reduced credit risk, and stronger supplier relationships, it stands out as a powerful tool for the industry. Backed by technological advancements and growing market demand, reverse factoring is poised to become an integral part of financial strategies in many sectors. As McKinsey & Company’s research indicates, the rapid adoption of this financing solution is not just a trend but a significant shift towards more efficient and resilient supply chain management. For wholesalers looking to stay competitive and financially robust, embracing reverse factoring is a strategic move towards a more sustainable and prosperous future.

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Comparing the Best Embedded Lenders for Accounts Receivables

Who are the top embedded lenders for accounts receivable

In the competitive landscape of wholesale, managing cash flow efficiently is essential for success. One increasingly popular solution is accounts receivable (A/R) financing through embedded lenders. These lenders purchase your outstanding invoices, converting them into immediate cash. However, the real advantage comes when these lenders are integrated into your existing ERP (Enterprise Resource Planning) systems. This article will compare top embedded lenders that purchase A/R, focusing on why Lendica stands out as the optimal provider for small and medium-sized wholesalers.

In this article, we’ll compare and contrast Lendica, PrimeRevenue, FundThrough and 1st Commercial Credit.

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Compare Embedded Lenders

Comparing Embedded Lenders for A/R

Metrics Lendica PrimeRevenue FundThrough 1st Commercial Credit
Fees Starting at 1% for 30 days Does not report Starting at 2.75% for first 30 days 0.69% to 1.59% per month
Integration with ERP & POS Systems ERP agnostic, integrates with most systems ERP agnostic, integrates with various systems Integrates with QuickBooks and OpenInvoice Free invoicing software, online account management
Loan Terms & Flexibility Up to 120 days with flexible payback schedules Flexible participation, debt-free, off-balance sheet 12-week repayment terms, flexible funding limits No fixed terms, flexibility based on invoice value
Funding Speed From instant to 48 hours Typically 2 to 5 days As fast as 24 hours 3 to 5 days to setup and 24 hours afterwards
Advance Rates Up to 100% Up to 100% Up to 100% 80 to 97%
Technology & Automation Features AI-driven platform, seamless software integration Digitized solution, automated processes AI-driven platform, seamless accounting software integration Automated invoicing and payment processes
Eligibility Requirements AI-driven underwriting to deliver widest approval and lowest rates Based on customer creditworthiness, flexible for various industries No minimum credit score, $15,000 monthly revenue recommended Low credit score accepted, minimal paperwork, no financials up to $350k

Why ERP integration matters as an embedded lender purchasing receivables

Streamlined operations

ERP systems consolidate various business functions, providing a unified platform for managing inventory, orders, and financials. When an embedded lender like Lendica integrates with your ERP, it automates the A/R financing process, reducing manual data entry and errors. This seamless integration saves significant time and ensures that all departments have real-time access to critical financial information.

Real-time financial insights

With ERP integration, businesses gain instant visibility into their financial health. Lendica’s integration allows you to quickly identify eligible invoices for financing, making informed decisions about cash flow management. This real-time insight is crucial for maintaining operational efficiency and ensuring timely payments to suppliers.

How to save money with embedded lenders

Lower financing costs

Choosing a lender with competitive rates is vital for minimizing financing costs. Lendica offers one of the best rates in the market, starting at 1% for 30 days. This affordability, combined with seamless ERP integration, allows businesses to maximize their savings. Lower financing costs mean more funds available for other critical business activities. You may also consider 1st Commercial Credit with rates starting at 0.69% per month.

Reduced administrative overhead

By automating invoice submissions and payments through ERP integration, Lendica significantly reduces administrative overhead. This automation eliminates the need for manual data handling, freeing up resources for more strategic tasks. The savings in time and labor can be substantial, translating into direct financial benefits for your business.

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Avoid manual processes to save you time and money in the long run.

Enhanced cash flow management

Effective cash flow management is essential for growth. Embedded lenders like Lendica provide real-time updates through ERP integration, helping businesses maintain a healthy cash flow. Knowing exactly when funds will be available allows for better financial planning and reduces the need for costly short-term borrowing.

Time and cost savings from automation

By integrating with your ERP, Lendica automates both the invoicing and accounting processes. This automation can save your business up to 200 hours per year, translating into approximately $20,000 in cost savings. These savings highlight the efficiency and cost-effectiveness of using an embedded lender integrated into your ERP system.

This automation can save your business up to 200 hours per year, translating into approximately $20,000 in cost savings.

Lendica research team

The importance of eligibility requirements when seeking an A/R facility

Data-driven AI lender

Lendica stands out due to its data-driven, AI-powered approach to lending. Traditional lenders often rely on rigid criteria that may not accurately reflect a business’s potential. In contrast, Lendica’s AI system continuously learns from your business data, getting more comfortable with risks that other lenders might overlook. This deeper understanding allows Lendica to offer more tailored financing solutions, ensuring that you get the best possible terms.

Speed of approvals

In the fast-paced world of wholesale, speed matters. Lendica offers some of the fastest approval times in the industry, often providing funding within 24 to 48 hours. Quick access to funds ensures that your business can seize new opportunities, manage unexpected expenses, and maintain smooth operations without disruptions.

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Conclusion: Lendica outperforms top rated embedded lenders in accounts receivable financing

ERP integration is crucial for businesses seeking to optimize their accounts receivable financing. Among the embedded lenders compared, Lendica stands out due to its competitive rates, seamless integration, and AI-driven approach. By choosing Lendica, businesses can save significant time and money, reduce administrative overhead, and maintain a healthy cash flow.

Investing in an embedded lender like Lendica not only enhances your financial management but also positions your business for long-term success. For small and medium-sized wholesalers, these benefits are critical for maintaining competitiveness and achieving sustainable growth. Consider Lendica to leverage these advantages and drive your business forward.

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How to Sell A/R to an Embedded Lender: A Step-by-Step Guide

Introduction

Managing accounts receivable (A/R) can be a complex and risky task for many businesses. Selling A/R to an embedded lender offers a streamlined solution that can mitigate credit risk, enhance cash flow, and automate accounting processes. In this guide, we’ll walk you through the steps to successfully sell your A/R to an embedded lender and highlight the key benefits of this approach.

Step 1: Understand Your A/R Portfolio

Before selling your A/R, it’s crucial to assess your portfolio. Identify which accounts receivable you want to sell, focusing on those with higher credit risk or longer payment terms. Understanding your A/R portfolio helps you determine which receivables are best suited for sale and maximizes the benefits you can gain from this process.

Remember: You don’t always have to sell your entire portfolio to the lender. In some cases, you may be able to sell only part of your accounts receivable and still maintain certain customer segments.

Step 2: Choose the Right Embedded Lender

Selecting the right embedded lender is vital. Look for a lender that integrates seamlessly with your ERP system to ensure smooth operations. Evaluate potential lenders based on their terms, fees, and support services. A good embedded lender should offer transparent terms and robust customer support to guide you through the process.

Important: Make sure the embedded lender can integrate directly with your ERP. If they cannot, you may be at risk of significant ongoing maintenance which will reduce any benefits from the sale. 

Step 3: Integrate the Embedded Lender with Your ERP

Integration with your ERP system is a key advantage of using an embedded lender. Follow these steps to integrate:

• Work with your ERP provider and the lender to connect the systems.

• Ensure data is synced correctly to avoid discrepancies.

• Test the integration thoroughly to confirm that A/R transactions are accurately reflected in your ERP.

Automating the accounting of A/R through ERP integration reduces manual work, minimizes errors, and keeps your financial records up-to-date.

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Step 4: Prepare Your A/R for Sale

Preparation is crucial for a successful A/R sale. Gather necessary documentation, including invoices, payment histories, and customer information. Ensure your A/R is well-organized and presented attractively to potential lenders. This preparation can make your receivables more appealing and streamline the sale process.

Bonus: If you are already using an ERP that works with the embedded lender, this process may be automated. For customers that use Datacor, for example, their preferred embedded lending is integrated directly into certain A/R and A/P tables. 

Step 5: Negotiate Terms with the Lender

Negotiating favorable terms with your lender is essential. Key points to discuss include:

• Advance rates: The percentage of the receivable’s value the lender will advance.

• Fees: Understand all fees involved to avoid hidden costs.

• Recourse terms: Determine if the lender requires you to buy back uncollected receivables.

Securing favorable terms maximizes the financial benefits and ensures a smooth transaction.

When negotiating, remember that the lender may not have the full picture of your business. You may have an advantage of working with certain customers for long periods of time and, in doing so, have established trusting relationships that the lender may not price in. If the lender gives you a bad rate, chances are they aren’t adept at risk-based pricing. 

Tip: Ask the lender how they do their underwriting. If they are not using historical customer ordering patterns or advanced data modeling on top of your ERP history, chances are they will not be accurately pricing your receivables. 

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Before proceeding, make sure to dig into any hidden fees lying below the surface of an otherwise good deal.

Step 6: Execute the Sale

Once terms are agreed upon, execute the sale. This typically involves:

• Signing a contract with the lender.

• Transferring the agreed-upon receivables to the lender.

• Receiving the advance payment from the lender.

Ensure you comply with any legal or regulatory requirements during this process.

Look out for “delayed purchase prices” that will involve the lender paying you out, be it partially or totally, upon collection of the receivables. Lenders may promise a small percentage of the receivables upfront and remit the remainder upon collection from your customers. This can be customary, but make sure you review the agreement with your legal and financial advisors prior to agreeing to avoid any unsavory clauses. 

Step 7: Manage Post-Sale Operations

After selling your A/R, manage post-sale operations efficiently. Maintain communication with your customers to ensure they are aware of the new payment arrangements. The lender will typically handle collections, but it’s important to stay involved to address any issues that may arise and ensure customer satisfaction.

In some cases, the lender will remain behind the scenes while in others the lender will take over the credit process on your behalf. It is important to weigh the pros and cons of bringing a third party into a customer transaction but, if you are able to find the right embedded lender, it can be a huge benefit. 

Benefits of Selling A/R to an Embedded Lender

1. Remove Credit Risk

By selling your A/R, you transfer the risk of non-payment to the lender. This allows you to focus on business growth without worrying about delinquent accounts. According to a recent Atradius Study, more than 55% of invoices in 2023 were not paid on time, and with each delayed invoice comes added operational drag. 

More than 55% of invoices in 2023 were not paid on time

Atradius B2B Payment Trends for 2023

2. Boost Cash Flow

Selling A/R provides an immediate cash infusion, enhancing your liquidity. Use this increased cash flow to invest in inventory, operations, or expansion.

3. Automate Accounting

Integration with your ERP system automates the accounting process. This reduces manual work, minimizes errors, and keeps your financial records up-to-date.

4. Control Customer Interaction

Maintain control over how and when customers are involved in the process. By involving customers on your terms, you enhance their experience and ensure they are informed and engaged.

Conclusion

Selling A/R to an embedded lender offers numerous advantages, including reduced credit risk, improved cash flow, automated accounting, and controlled customer interactions. By following this guide, you can streamline the process and unlock the financial and operational benefits of selling your A/R. Consider this option to enhance your business’s financial stability and efficiency.

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Key drivers of Rising A/R for Chemical Distributors

Introduction

In 2024, businesses throughout the chemical industry are witnessing a startling rise in accounts receivable (A/R). On average, businesses are experiencing an 8% increase in Days Sales Outstanding compared to the same quarter last year, as detailed in our Q2 ’24 Working Capital Spotlight: Chemicals. Economic uncertainties and changing market dynamics are forcing companies to adapt their financial strategies, leading to increased payment terms and extended A/R periods. This trend poses several risks, including cash flow constraints and downstream unsuitability. Understanding the reasons behind rising A/R and the associated dangers of increased Days Sales Outstanding (DSO) is crucial for effective financial management.

Why is my accounts receivable rising in 2024?

Businesses throughout the chemicals industry are experiencing a rise in accounts receivable throughout 2024. If you have been struggling with a rise in A/R, the below may help to explain some of the issues currently at play.

Economic uncertainty.

The chemical industry, a cornerstone of the global economy, is grappling with an 8% year-over-year decline in sales. 

What is driving this downturn?

As outlined in Deloitte’s 2024 Chemical Industry Outlook, economic uncertainties and fluctuating market demands have led to tighter budgets and cautious spending. In response, companies are adopting stricter working capital management strategies. 

How does this impact A/R?

Your larger customers are critically focused on their cash conversion during periods of uncertainty. As a result, they will err on the side of caution for any invoice that needs payment. You may start to experience friction around invoice due dates including additional emails back and forth, excuses on why invoices are late, and even hints of longer payment terms.

Note: Don’t be surprised if experience some slight hiccups with your standard invoice processing throughout the second half of the year. Companies, even large, publicly traded enterprises, may still employ various techniques to delay their payment by just a few days to meet their working capital goals.

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Industry-wide extended payment terms.

What do extended payment terms mean for your A/R? Your competitors may be offering deeper seller terms to stay competitive and retain customers amid economic challenges. This may lead to an updated expectation on industry norms which can impact negotiations with new contracts.

Warning: this practice can impact cash flow and puts additional strain on financial resources. For small and medium-sized distributors, the balance between offering favorable terms and maintaining healthy cash flow is delicate and critical. Be careful on following competitors into offering extended terms without first addressing your working capital cycle.

Inventory levels near the lows.

How does industry inventory levels affect A/R? In efforts to shorten cash conversion cycles, companies have been reducing inventory levels over the last twelve months. This is evidenced by the large drop in Days Inventory Outstanding, or DIO, found in the Q2 Chemicals Index. While this strategy frees up cash tied in stock, it can also lead to supply chain inefficiencies. 

Delays in fulfilling orders due to lower inventory can cause delays in customer payments, thus extending A/R periods. Your downstream customers likely have lower inventory levels than last year, which can lead to supply chain shortages and thus delayed payments.

Collection challenges

The complexity of managing collections has increased, particularly for companies with a diverse customer base that includes smaller retail and distributor accounts. 

Despite technological advancements, the high volume and varied nature of transactions add to the challenge. Efficient collection processes and robust credit management systems are essential to keep A/R under control and reduce DSO.

According to the Atradius Payment Practices Barometer, 42% of invoices in the chemicals industry are paid late, which directly impacts DSO and cash flow.

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How to Sell A/R to an Embedded lender

Discover this simple techniques with a step by step guide on selling A/R to an embedded lender.

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What Are the Risks of a Surge in DSO?

Cash flow constraints

Why is an increase in DSO a concern for cash flow? Longer DSO means companies take longer to collect cash from sales, creating cash flow constraints. This can hamper a company’s ability to meet operational expenses, pay suppliers, and invest in growth opportunities. 

Your DSO is a key benchmark for the financial health of your organization. When A/R increases, your DSO will increase and you run the risk of not meeting your monthly cash expenses. 

Importantly, not all A/R will be collected. A study by Euler Hermes found that businesses in the chemicals industry write off an average of 1.2% of their receivables as bad debt annually. This percentage might seem small, but for a company with $3 million in monthly sales, it translates to $432,000 annually.

Damaged supply chain relationships

How can rising DSO affect vendor relationships? Increased DSO can strain relationships with vendors who rely on timely payments to manage their own cash flows. Consistent delays in payments can lead to a loss of trust and reliability, resulting in less favorable terms or reduced willingness to do business. Maintaining strong vendor relationships is crucial for operational efficiency and negotiating better terms in the future.

As detailed in a recent McKinsey & Co report, long DSO cycles can strain the supply chain, leading to delays in procurement and production processes, ultimately affecting the timely delivery of goods and services to customers.

Long DSO cycles can strain the supply chain.

McKinsey & Company Improving the Business-to-Business Customer Experience

Inventory log jams

What impact does high DSO have on inventory management? High DSO can lead to inventory log jams, where projects stall due to lack of funds to purchase necessary materials. This can create bottlenecks in production and delivery schedules, further exacerbating cash flow issues and delaying revenue generation. 

Efficient inventory turnover is essential for maintaining production schedules and meeting customer demands.

Staff retention risk

How does DSO affect staff retention? Prolonged DSO can result in cash flow problems that may lead to missed or delayed paychecks for employees. 

This can significantly affect staff morale and retention, as employees may seek more stable employment opportunities. Ensuring timely payroll is critical for maintaining a motivated and productive workforce.

Missed financial opportunities

Effective A/R management provides valuable insights into customer payment behaviors and financial health. A poorly managed platform fails to capture and analyze this data, resulting in missed opportunities for financial optimization.

In fact, companies using advanced A/R analytics report a 10-20% improvement in cash flow management, according to McKinsey & Company. Remember, missing out on financial optimization opportunities means your business is not operating at its full potential, leaving money on the table that could be used for growth and investment.

Conclusion

Understanding why A/R is rising and the risks of increased DSO is crucial for small and medium-sized distributors in the chemical industry. Economic uncertainties, extended payment terms, inventory management adjustments, and collection challenges contribute to rising A/R. The risks associated with increased DSO include cash flow constraints, higher financial costs, reduced investor confidence, and operational inefficiencies.

To navigate these challenges effectively, companies must implement robust credit policies, leverage technology for better collections, and maintain optimal inventory levels. By doing so, they can enhance liquidity, improve investor confidence, and sustain operational efficiency in a volatile economic landscape. Proactive financial management and strategic planning are key to mitigating risks and driving growth in 2024.

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Glossary: Defining Commonly Used Financial Terms

Introduction

Welcome to the Lendica Glossary. This comprehensive guide helps to explain key financial terms and concepts relevant to embedded lending and business financing. Whether you’re a small business owner, CFO, or financial enthusiast, this glossary will help you understand essential terms and how they apply to your financial operations.

Terms

2/10 Net 30

A payment term offering a 2% discount if an invoice is paid within 10 days; otherwise, the full amount is due in 30 days. This incentivizes early payment and improves cash flow.

Example Formula:

Discount Amount = Invoice Amount × 0.02

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Accounts Payable

Money owed by a business to its suppliers for goods or services received but not yet paid for. Managing A/P effectively is crucial for maintaining good supplier relationships and ensuring the business has adequate cash flow and operational liquidity.

Accounts Receivable

Money owed to a business by its customers for goods or services provided but not yet paid for. Managing A/R effectively is crucial for maintaining cash flow and operational liquidity.

Days Inventory Outstanding (DIO)

Measures the average number of days inventory is held before it is sold.

Example Formula:

If a company has an average inventory of $50,000 and a COGS of $200,000, the DIO would be 50,000/200,000 x 365 = 91.25 days.

Days Payables Outstanding (DPO)

Measures the average number of days a company takes to pay its suppliers.

Example Formula:

If a company has accounts payable of $30,000 and a COGS of $200,000, the DPO would be 30,000/200,000 x 365 = 54.75 days.

Days Sales Outstanding (DSO)

Measures the average number of days it takes to collect payment after a sale.


Example Formula:
If a company has accounts receivable of $25,000 and total credit sales of $150,000, the DSO would be 25,000/150,000 x 365 = 60.83 days.

Embedded Lending

A financial service integrated within a software platform, enabling users to access credit seamlessly. It simplifies the borrowing process and enhances user experience by providing financial services within existing workflows.

Enterprise Value

Enterprise Value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to market capitalization. It includes the market cap, debt, minority interest, and preferred shares, minus total cash and cash equivalents. EV is useful in assessing the value of a business for potential acquisition.

Example Formula:

Enterprise Value = Market Capitalization + Total Debt + Preferred Shares + Minority Interest – Cash and Cash Equivalents

For instance, if a company has a market cap of $50 million, total debt of $10 million, and $5 million in cash, its EV would be $55 million.

ERP Integration

The process of connecting a company’s Enterprise Resource Planning (ERP) system with other applications to streamline operations and ensure consistent data flow. It improves efficiency and accuracy in financial management.

Factoring

A financial transaction where a business sells its accounts receivable to a third party at a discount to receive immediate cash. This helps businesses manage cash flow and reduce credit risk.

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Factor Rate

A factor rate is a fixed multiplier used to determine the total repayment amount in a merchant cash advance or factoring agreement. Unlike traditional interest rates, factor rates are expressed as a decimal figure, typically ranging from 1.1 to 1.5. The total repayment amount is calculated by multiplying the advance amount by the factor rate.

Example Formula:

Total Repayment Amount = Advance Amount × Factor Rate

For instance, if the advance amount is $10,000 and the factor rate is 1.2, the total repayment would be $12,000.

Reverse Factoring

A financial arrangement where a third party finances a company’s suppliers, allowing the suppliers to get paid early while the company pays the third party later. It enhances supplier relationships and improves cash flow management.

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Small Bill Charges

Additional fees that a service provider applies for processing smaller invoices or bills, typically to cover administrative or processing costs. These charges are often implemented to ensure that even smaller transactions remain cost-effective for the business providing the service.

Vertical SaaS

Vertical SaaS is software designed specifically for the needs of a particular industry or niche, such as healthcare or finance. It provides specialized features and solutions tailored to the unique challenges of that sector.

Working Capital

The difference between a company’s current assets and current liabilities, representing the liquidity available for day-to-day operations. Effective management of working capital is essential for maintaining business solvency.

Example Formula:

Working Capital = Current Assets – Current Liabilities

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Competitive Analysis: Which Embedded Lending Platform is Right for Me?

Which Embedded Lending Platform is Right?

There are five major companies serving the embedded lending space: Lendica, Lendflow, Parafin, Jaris, and Kanmon.

Based on our experiences embedded lending products over the past several years, we have found the top five categories that companies (Vertical SaaS, POS, ERP, Marketplace, eCommerce, etc) look for when making their embedded lending decision.

These categories include

  • Speed and ease of installation
  • Product design and functionality
  • Loan products, approval rates, and terms
  • Ongoing costs to market the product to their customers, and
  • Continuous platform improvement

We compare all five companies and conclude that Lendica, Lendflow, and Parafin have advantages in the following categories.

  • Best embedded solution: Lendica
  • Best embedded broker: Lendflow
  • Best alternative to Lendica: Parafin

Easy to Install

The first step to consider is the cost to install your embedded lending solution. There are explicit and implicit costs to be aware of. The embedded lender may offer the installation for free, such as Lendica, and generate its revenue on success (i.e earning fees for good loans). Be warned that some solutions, Lendflow for example, will charge upwards of $1,200 per month to install the service.

The implicit cost is typically much higher. Some embedded lending solutions, such as Kanmon, can be quite labor intensive to install. Companies seeking to embed lending products should be aware of the development time spent to build the integration. Lendica’s embedded lending product is designed to be “off-the-shelf” with the ability to customize. Partners can actually install Lendica with just a few lines of code and it can be activated in minutes. To demonstrate, we bought a Tesla with Lendica in just a few minutes.

Based on our analysis of integration time and explicit cost, we estimate that most software companies can be up and running, at scale, with Lendica 10 times faster and most cost effective than most other embedded lenders.

Lendica’s industry leading embedded lending solution is 10x better than the market.

Simple to Use

An important next step to consider is the product design and use. Aesthetic appeal in software isn’t just about good looks—it can greatly influence user behavior. An appealing, modern interface attracts customers and entices them to explore further. Lendica’s product is visually engaging and designed with user experience in mind. This ensures customers feel comfortable and attracted to the software, thereby increasing the probability of continued usage and loyalty.

Ease of use is another significant determinant when choosing software solutions. The ability for users to understand and navigate the product efficiently without needing extensive training or support is crucial. The more questions your customers ask, the most expensive the embedded solution becomes as it requires servicing and updates. With an intuitive interface and features, Lendica significantly reduces the learning curve for new users. This accelerates the adoption process, saving software companies valuable time and resources, and leading to quicker returns on their investment.

Design is a difficult category to quantify, so we invite you have a look at Lendica’s product and decide for yourself.We estimate that, aside from a design advantage, the intuitive and inviting nature of Lendica’s product can dramatically increase conversion by more than 10x compared to other embedded lenders.

More Customer Approvals

There are two factors that the decision-maker should consider as it relates to approvals: product mix and underwriting strength. More products equate to more approval opportunities, catering to a broader range of customer needs. Lendica’s approach in offering four funding products demonstrates its understanding of varied customer profiles and their unique requirements. Unlike some platforms such as Jaris and Parafin, which only offer merchant cash advances, Lendica ensures flexibility and inclusivity by providing a broader product mix.

Lendflow, although not a direct lender themselves, does offer customers a wide variety of funding products through its broker network. End customers that are interested in a loan will share some data with Lendflow which will in turn market their business file to its audience. It should be noted that while this does widen Lendflow’s product offering, it does dramatically increase the costs to the end-customer.

Strong underwriting methodologies are key to the success of any lending platform, as they contribute to lower rates by reducing defaults. Lendica’s AI-powered underwriting engine incorporates partner platform data, thereby gaining a more detailed and accurate understanding of risk. This information-driven approach leads to a robust underwriting process and therefore industry-leading approval rates. Parafin, although focusing on only one funding product, does tend to use platform data to make underwriting decisions similar to Lendica.

Built-in Marketing

The ongoing marketing efforts towards the end customers in the embedded lending space can indeed pose significant costs and time expenditure. Companies considering embedded lending should assess the marketing budget to nudge the customers towards the product.

We believe Lendica is the only embedded lender directly address this concern by integrating a unique in-app marketing engine. This feature serves a dual purpose – it substantially reduces the associated marketing costs and concurrently enhances customer engagement. Lendica’s built-in marketing engine eliminates the need for separate, costly marketing initiatives. Instead, it delivers relevant, targeted messages and prompts within the app interface itself, keeping customers informed and engaged, which ultimately fosters a deeper relationship with the user. Importantly, these features are customizable and can be turned on/off as directed.

Lendica offers free trials to its customers, embedded right into their everyday workflow.

Lendica also offers in-app campaigns, including free trials, designed to entice potential customers and provide them an opportunity to experience the product first-hand. This proves to be a powerful conversion tool – customers can get up to $10,000 free to try – and comes at no cost to the partner.

The goal of these in-app marketing features is to improve the per-dollar conversion by 100x any other embedded lender. We believe that this is currently the case.

Continuous Innovation

When you embed a lending product, you are not just betting on a great service today, but rather a great service for years to come. For that reason, Lendica remains focused on continuous innovation.

Each new feature Lendica develops is guided by three fundamental questions. First, will it enhance the customer’s embedded experience? Second, can it reduce the costs per conversion for the partners? And third, does it have the potential to change how small businesses access financial services? These considerations ensure that Lendica’s enhancements not only serve immediate needs but also propel the future of small business financial success.

Choosing Lendica is not simply a choice for today; it’s an investment in a service that evolves and adapts to future needs. The rapid progression of the fintech industry necessitates a responsive and proactive approach to innovation. Lendica embodies this by continually improving its services to meet and exceed the changing needs of customers and partners. As such, the decision to embed Lendica’s lending product is a commitment to long-term growth and transformation.

Conclusion

In conclusion, the future of embedded lending clearly lies in services that are fast, efficient, user-friendly, and innovative. Lendica is at the forefront of this evolution, with its quick and easy installation, sleek product design, improved loan approval rates and terms, reduced marketing costs, and soon-to-be-unveiled AI enhancements. It’s not just about providing a service but creating an ecosystem where businesses can flourish with minimal barriers and maximum support. While competitors may offer pieces of the puzzle, Lendica brings them together, presenting a complete picture that is greater than the sum of its parts. This is why we confidently say Lendica provides a 10x advantage. Embrace the future of embedded lending with Lendica, and experience a seamless financial journey tailored to your unique business needs.

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Take Control of Your Business Cashflow with Lendica

Small Business Cashflow Toolkit

In the dynamic world of small businesses, managing cashflow effectively is a critical success factor. Lendica, a provider of affordable, on-demand finance, offers a cashflow toolkit with three distinct products designed to help small businesses better manage their cashflow. These three products – PayLater, FundNow, and PayLater for Your Customer – offer unique benefits that can significantly enhance a company’s financial stability and growth potential.

The first of these products, PayLater, is designed to boost a company’s buying power by delaying payments to vendors. This innovative tool allows businesses to increase their order sizes without the immediate financial burden, thereby qualifying for quantity discounts and improving their profit margins. For instance, a small retail business could use PayLater to purchase larger quantities of inventory at a discounted rate, thereby increasing their profit margin when these items are sold. Moreover, PayLater helps businesses smooth out vendor payments, thus avoiding sudden shocks to their bank balance. This can be particularly beneficial during periods of unexpected expenses or lower-than-expected revenues, as it allows businesses to maintain their operations without the stress of immediate large payments.

Lendica’s funding toolkit helps small businesses stay competitive and reach scale faster.

FundNow, the second product in Lendica’s suite, is aimed at accelerating the collection process from customers. With FundNow, companies can get paid immediately on client invoices, enabling them to reinvest in inventory, marketing initiatives, or other business growth opportunities without having to endure painful delays in collection. For example, a small manufacturing company could use FundNow to immediately reinvest in raw materials, rather than waiting for customer payments to come in. This immediate access to funds can significantly improve a company’s operational efficiency and financial health, allowing them to seize opportunities as they arise.

Lendica’s third offering, PayLater for Your Customer, is a tool that allows companies to offer flexible payment terms to their customers while ensuring they get paid upfront. This product is free to use and provides a win-win situation for both parties. Companies get paid immediately upon delivery, while their customers enjoy the flexibility of extended payment terms. For instance, a small business selling high-ticket items like furniture or electronics could use PayLater for Your Customer to offer their customers the option to pay in installments, thereby potentially increasing sales while still ensuring immediate payment upon delivery.

In conclusion, the suite of products can have a major impact on how small businesses manage their cashflow. By using tools that delay vendor payments, speed up customer collections, and provide flexible payment terms to customers, small businesses can better navigate financial challenges and refocus on their core competencies. These innovative solutions not only enhance a company’s financial stability but also contribute to its growth and success in the competitive business landscape.

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Embedding With Lendica: The Perfect Opportunity in Today’s Financial Landscape

In a rapidly evolving financial climate where traditional banks are falling short on lending, tech companies are presented with an opportunity to help. Embedding lending into SMB platforms, such as marketplaces, vertical SaaS, and tech-enabled distributors, can provide an efficient, elegant solution to this growing concern. We discuss some of the major benefits to adding an embedded lending stack in today’s market.

A Gap in the Market

The primary driver in the current financial landscape is the reluctance of banks to lend. Banks’ reticence has left hundreds of thousands of businesses with inadequate resources to navigate these challenging times. By embedding a lending solution into your customers workflow, you are signaling to your clients that you care about their concerns. Importantly, because Lendica is both the technology provider and the balance sheet, you can be rest ensured that capital continues to flow directly to your customers, filling the gap left by traditional banks.

The world’s most powerful, versatile, all-around-good-time-of-an embedded lending platform.

Additional Revenue Streams

As we’re faced with a challenging economic climate, we have found many software businesses looking to explore new ways to generate revenue. Integrating lending solutions into existing platforms introduces a new revenue stream with limited technology spend. By embedding Lendica’s lending solutions, technology companies can quickly stand up a lending solution – typically in two to four weeks. The income earned from loan origination fees and interest can diversify revenue streams and strengthen the bottom line to face difficult market head on.

Enhancing User Experience

User experience is key to success in the tech industry. By offering a seamless lending process, companies can significantly improve their user experience. With Lendica, users won’t have to switch between different platforms to access lending services. Instead, they’ll find everything they need in one place – a one-stop-shop approach that greatly enhances user convenience.

The current economic landscape presents a perfect opportunity for tech companies to explore embedded lending. With traditional banks shying away from lending and businesses seeking ways to remain resilient, integrating a lending solution like Lendica can be a game-changer. It empowers customers, boosts revenues, enhances user experience, and above all, it fills a critical gap in the market, making this a perfect time to embed with Lendica.

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Why Hansa Chose Lendica Over Lendflow: A Better Lending Solution for Small Businesses

Introduction:

Hansa, a novel, free tool designed to help small business owners maintain accurate and consistent financial data, had recently been on the lookout for an embedded lending platform to offer loans to its customers. After considering Lendica and Lendflow, two major providers in the industry, Hansa ultimately decided to partner with Lendica. In this article, we will explore the reasons behind this decision and why Lendica’s solution proved to be the better choice for Hansa and its customers.

Fully Embedded Solution

One of the primary reasons Hansa chose Lendica over Lendflow is the fully embedded nature of Lendica’s solution. Lendica’s platform seamlessly integrates with Hansa’s existing systems, allowing for a streamlined and user-friendly experience. This means that small business owners can access instant digital loan products directly through Hansa’s platform without having to navigate through multiple websites or applications. Lendica’s application can be pre-populated with Hansa’s customer data making it even easier for small businesses to access capital in these trying times.

Lendica’s iBranch embeds lending anywhere.

Secure Data Transfer

In today’s digital age, data security is paramount. Lendica’s platform ensures that the business data exchanged between Hansa and financial service providers is securely transmitted, maintaining the privacy and integrity of sensitive information. On the other hand, Lendflow’s embedded web form was unable to offer the same level of data security, which is a critical factor for businesses dealing with financial data.

Instant Decision Making

Hansa’s primary goal is to provide small business owners with a seamless experience when seeking financial assistance. Lendica’s platform offers instant decision-making capabilities, allowing customers to receive loan offers in real-time. This not only saves time for business owners but also helps them make informed decisions quickly. In contrast, Lendflow’s solution could not provide instant decisions, which may lead to delays and hinder the overall user experience.

Customization and Scalability

Lendica’s platform is highly customizable and scalable, allowing Hansa to tailor the lending experience to the specific needs of its customers. This flexibility ensures that the platform can grow and adapt alongside Hansa’s user base, providing continued support and resources to small business owners. Lendflow’s solution, however, lacked the same level of customization and scalability, potentially limiting its effectiveness in meeting the diverse needs of Hansa’s customers.

Conclusion:

After a thorough evaluation of both Lendica and Lendflow, Hansa has confidently chosen Lendica as its embedded lending platform partner. Lendica’s fully embedded solution, secure data transfer, instant decision-making capabilities, and customizable platform offer a superior lending experience for small business owners. By partnering with Lendica, Hansa reaffirms its commitment to providing top-notch financial support and resources to its customers, empowering them to grow and succeed in today’s competitive business landscape.