Outsourcing Credit

Companies have long benefited from outsourcing.  Popular trends in outsourcing include the business services of payroll, accounting, tax, data entry, human resources, help desk, customer service, lead generation, IT and software development.  A strategic decision to outsource can increase efficiency and allow companies to focus on their core competencies.  Outsourcing can lower costs, make more efficient use of time, labor, capital, technology and specialized resources. 

Retailers long ago discovered the benefits of outsourcing consumer store credit.  Card companies like MasterCard and Visa have built payment systems with economies of scale that deliver effeciencies and costs savings.  By accepting card payments, sellers do not have to worry about the credit of the buyer, nor does the seller have to incur the costs associated with administering the account or bad debt - all of this work is done, for a fee, by the card issuers.   As a result, 95% of all consumer retailers have outsourced their accounts receivable and credit administration function by accepting credit and debit cards.

Accounts receivable (A/R), sometimes called trade receivables or trade credit, is the amount that customers owe a company for goods and services that have been provided.  Traditionally, businesses to business (B2B) transactions are conducted using seller financed trade credit.  Trade credit provides the ability for buyers to purchase goods and services now and pay later.  Typically, the seller sends an invoice requesting payment in a pre-determined number of days.  Essentially, it’s a free short term loan from the seller to the buyer.

B2B buyers depend on trade credit as one of their largest sources of capital  The reasons are simple: trade credit is free (interest is rarely charged), it is flexible (terms are regularly abused) and it is easy to get (if one vendor doesn't provide, the next vendor will). Business buyers will seek out vendors that give the longest payment terms because it is the easiest and least expensive way to fund their business.

Outsourcing accounts receivable for a B2B seller is similar to a consumer retailer accepting a credit card for payment—it enables the seller to immediately receive payment while offering extended payment options to the buyer. This option allows companies to access working capital and lower expenses associated with their credit administration.   Outsourcing accounts receivable also provides a competitive advantage by allowing sellers to offer the best trade credit terms possible to aquire and retain customers. 

Given the current economic conditions, businesses are finding it difficult to increase revenue (due to restricted consumer and business spending) or secure bank funding (due to stricter credit requirements).   Outsourcing has distinct advantages over "factoring" including lower advance rates and greater value by more efficiently handling trade credit functions to reduce administration expenses.   Most small and mid sized businesses don't have the scale to operate trade credit operations cost effectively.   As businesses become familiar with the simplicity of trade credit outsourcing, it will be the model by which virtually all B2B transactions will be conducted.

by Ty Hardison

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