With the 2012 Summer Games in full swing, businesses are playing a game of their own – trying to figure out what the U.S. Federal Reserve will do to stimulate the flagging economy. While the central bank stopped short of acting to spur the recovery in it's statement yesterday, it has indicated that it will do so if labor market conditions and overall growth continue to lag.
Fed Guessing has become an Olympic sport of sorts. And while opinions vary widely on what action the institution will ultimately take, according to the Fed's own statement yesterday, it’s nearly certain that short-term interest rates will continue to remain near zero for at least another 2 years!
"In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014"
While Fed actions over the next few months (or whenever it decides to act) could spur growth in the economy, the basic realities of hard to come by credit/liquidity for many suppliers, and low value of liquidity for those buyers that have cash on hand are unlikely to change anytime soon even with that. And as suppliers ramp up production to meet Buyer growth needs, those suppliers will have need of access to liquidity even more…and your growth plans as a buyer could be at risk if they can’t get it..
There is a solution that can benefit both parties, however. And there’s no need to wait for the Fed to put it action. It’s called dynamic discounting. And it lets companies with cash maximize their returns by investing in their suppliers who can use the capital to keep pace with their demands and help to fuel growth.
Here’s how it works: In return for a discount, buyers can accelerate payments for approved invoices to key suppliers. They earn an immediate – and better return on their cash than they would by simply parking it in traditional, low-yield liquidity vehicles. Their trading partners, in turn, can use the cash to fund their daily business needs and ensure they can meet the buyers’ ongoing demands
And suppliers win as well. As the gap between low-quality and high-quality borrowers grows, more suppliers are finding it tough to access the capital they need to sustain – much less grow – their operations, as one supplier on the Ariba Network(TM) can attest.
“The cost of capital today is high for startups. Even with strong revenue growth, when you haven’t been in business for a long period of time, you often won’t have a balance sheet or P&L that can be levered to get competitive rates from traditional financing sources,” said John Evarts, Chief Operating Officer and Chief Financial Officer of Mediafly, a Chicago-based company that delivers a cloud-based platform and applications for content management and distribution on mobile devices to Fortune 500 companies.
Mediafly has been able to work around this through dynamic discounting. “For a few basis points, we can get quicker access to the capital we need to hire developers and get to the next set of features in our products, which accelerates revenue and ultimately generates cash,” Evarts said
Getting buyers to agree to pay early and sellers to offer a discount might seem like an impossible task. But business networks and the technologies underlying them actually make it quite simple. Delivered in the cloud, such solutions provide buyers and sellers with all of the tools necessary to fully automate the process of offering, negotiating, and agreeing on early payment terms. Buyers can capture discounts at any point between invoice approval and the net due date and automatically present offers to lock them in. Suppliers can automatically accept offers or control the acceleration of payment on an ad-hoc basis according to their needs.
During tight times, the tendency for most organizations is to shore up costs and adopt a myopic approach to conducting business. But doing so will only lead to missed opportunities. Collaboration is key to navigating through a market slowdown. And business networks make it easier than ever to do.
Buyers and suppliers who tap into them and leverage tools like dynamic discounting to work more closely together and share the economic burden of the times can ensure their mutual health and help to spark the growth that the global economy so desperately needs.