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Our flagship series will propel you to the forefront of the global ecommerce revolution. From analyses of breaking current events to the intricacies of navigating cross-border sales and regulations, Business over Borders entertains and informs any audience who wants to learn more about how international ecommerce works.
Welcome to business over borders brought to you by the Reach Network, where we help you become a payments expert. I'm your host, Leo Tucker. I'm joined today by VP of finance here at Reach and my dear friend, Kevin Brent. Kevin?
Kevin Brent:We're here to talk about working capital.
Leo Tucker:That's right. Obviously, businesses need money to do the things they need to do.
Kevin Brent:Yes.
Leo Tucker:Payroll, paying vendors, growing the business. Yep. What kind of things are you seeing in the market that's specifically challenging for selling cross border?
Kevin Brent:Yeah. Well, I mean, obviously, there's complications with cross border, but there's been a whole bunch of things that impact every business that have happened to lately. So just to date this, that it's being recorded in May of 2024. Right. Sounds right.
Kevin Brent:For posterity, we've seen a couple of years of interest rate hikes. All of the sudden, capital has a cost. It's not free anymore. And so from a working capital standpoint, it means that if you have inventory or other things that you are carrying that require cash, you borrow that cash, it costs you more money in terms of interest. Right.
Leo Tucker:Cash is more expensive today than it was 3 years ago.
Kevin Brent:Exactly. Right? And so what businesses will do is they will, stretch their payables, which is basically when you acquire merchandise that you want to sell on to the end purchaser, you'll get an invoice. And that invoice can say, it's payable on demand, or it's due in 30 days or 60 days or 90 days.
Leo Tucker:Right.
Kevin Brent:And so this is sort of trade finance that occurs, across the globe, every jurisdiction, and it doesn't really matter where you sell. You can be a completely domestic business. You're still gonna do the same thing. Because if you can sell that inventory faster than you pay for the inventory, it means that you get the money to pay the bill. And so, effectively, the wholesaler that you acquired that merchandise from is financing a portion of that sale.
Kevin Brent:So, basically, what you're looking to do is acquire cash before you have to send that cash out.
Leo Tucker:Right. The order is important.
Kevin Brent:The order is very important. Right? On the flip side of that, of course, there's 2 ways you can reduce. 1 is stretch the payables, which impacts the wholesaler, and the other is to collect faster. Right?
Kevin Brent:So when you're selling and in the b two b space, if you're selling or you are the wholesaler, then you typically send out an invoice Mhmm. And that person will have due on demand 30, 60, 90 days
Leo Tucker:Right.
Kevin Brent:To pay it. So the trade finance sort of flows downhill. Right? And then, of course, when you're the end retailer, you're taking credit cards, you're gonna get paid almost immediately.
Leo Tucker:Right. These are your storefronts. These are your brick and mortar shops. These are your pizza places, your online store that are actually taking the payments.
Kevin Brent:Exactly. Yes. If you are in the middle of that chain, for instance, you can significantly reduce your working capital requirements by collecting immediately, but having your payments beyond net terms. Right. Which
Leo Tucker:Terms downstream, immediate upstream.
Kevin Brent:Exactly. So one of the things that we've been working working on and that we now offer is, of course, payment terms for, for any of the businesses that we are partnering with to be able to offer those same net terms, 30, 60, 90 days Mhmm. To their customers, but collect immediately through an intermediary service. So, basically, it is it is net terms. So there is a cost associated with that Mhmm.
Kevin Brent:Naturally, but it is also going to save you on your working capital requirements, the cost of capital that's required there, etcetera, etcetera. Free up that capital for other productive uses. Right?
Leo Tucker:And do we see this for smaller businesses as well, or is this kinda just reserved for the medium to large size businesses these terms?
Kevin Brent:Anyone can plug in this payment option. Right? What is more challenging is, of course, they do have to go through a credit check. So the smallest businesses that don't have significant payment history, don't have high enough credit score, all that kind of stuff may not qualify. So it's typically going to be the medium to larger sized businesses
Leo Tucker:that are gonna get
Kevin Brent:qualified for this. Because at the end of the day, you know, the intermediary is taking on the credit risk that you are already taking on on if you're offering Mhmm. Payment terms to any one of your customers. Right? I mean, we've all I shouldn't say we've all.
Kevin Brent:Every business that has invoices has had to chase them at one time or another. Yep. Right? And so, instead of having to poke, poke, poke and say, hey. You owe us this money.
Kevin Brent:Can you please pay us? You're getting paid immediately, and it's the intermediary that's taking that risk of collection on.
Leo Tucker:So when I imagine b to b sales, I imagine, you know, a service or a product being provided, and I'm sending out a paper invoice, a paper invoice.
Kevin Brent:Fax it.
Leo Tucker:Yeah. They fax it. Yeah. And then accounts receivable puts in a giant stack of other Yep. Yep.
Leo Tucker:Yep. Paper invoices.
Kevin Brent:And, you know, and they record the date received and the date paid with a stamp.
Leo Tucker:That's right. Yep. And it must go in a filing cabinet for some amount of time.
Kevin Brent:Yes. Yes. Well, back when the inbox was actually a box.
Leo Tucker:So how is that changing, and how how does that affect sort of, you know, cash flow and time and everything like that? Like, how does that work into what we're
Kevin Brent:talking about here? Look. There's there is still a significant number of businesses out there that do send paper invoices and that paid or get paid with checks. Yeah. Right?
Kevin Brent:Like, you know, physical checks, dual signature. Obviously, that is right for efficiency gains. So, obviously, you know, there's benefits to digital invoices errors that are associated with manual data.
Leo Tucker:Sure. Yeah. Automated out. Yeah.
Kevin Brent:And part of that, a very important component of that is tying it all in with your your payment system. Right? And one of the big benefits of using a service like ours is that, we do not displace your existing payment processor. If you've already got all of that set up, it's perfect because it's been done for your domestic payments. We don't need to touch that.
Kevin Brent:You're good to go. Basically, what our service is designed to provide is the facilitation of all of the international payments. So instead of, additional cross border fees, your customer's paying the FX, conversion premium for translating to your invoice currency. Again, generally, it's all in USD because, Right. There's very few countries in the world that will not allow you to open your business to open a USD denominated account.
Kevin Brent:No. Sorry, Cuba. Yeah. Right. But the the local currency that you operate in is going to be, you know, much more useful for for the majority of your costs outside of your international, trade flows.
Kevin Brent:Right? By using a service like ours, it's effectively, being able to outsource treasury management, which is great for small medium sized businesses that don't have an entire team that's going to be, managing all of the different currencies that you would be selling in different countries, etcetera, as you spend globally. Right? Maybe not directly related to working capital, more related to profitability. But if you wind up reducing your, payment processing costs by even 1%.
Kevin Brent:Mhmm. Right? I mean, that's just increased margin. Yeah. Right?
Kevin Brent:Like, there's
Leo Tucker:1% more customer Exactly. Yeah.
Kevin Brent:Yeah. Yeah. Not to mention the the the increase in conversion rates, everything else along those lines. Right? To tie it back to the the working capital that we were talking about earlier.
Kevin Brent:Right? Is the faster you can turn over your inventory, the less working capital you need. Right? So if you've got 30 days to pay for that inventory and you sell half of it, well, then you still gotta cover the other half. I mean, obviously, there's some margin in there that you would have earned and everything else, but let's just do McNekton math here.
Kevin Brent:And if you had the same number of customers, but 10% more of them were able to buy or converted on your website, well, then all of a sudden you've sold, you know, 60% of that inventory. And so you've got to float less of it with your own capital, which reduces your working capital capital requirements.
Leo Tucker:Yeah. And decreasing your working capital requirements is just as good as increasing your working capital, I assume.
Kevin Brent:Yeah. Yeah. Yeah. Right. I mean, at at the end of the day, it sort of depends where where you are in the in the chain.
Kevin Brent:Right? So if I'm if I'm talking about the the end retailer, right, that's collecting immediately, it's about that inventory turnover. Right? And the amount you have as opposed to if you're in the middle of the chain, then it's really about reducing your day sales outstanding. And day sales outstanding is just basically taking a look at on average, how many days does it take to pay an invoice?
Leo Tucker:Okay.
Kevin Brent:Right?
Leo Tucker:So So invoice comes in, start the clock, check goes out the door.
Kevin Brent:Right. Right. Right. That's exactly it. Or check check is received, and then you go to the bank, which takes a day, and then they put it on hold for 5 days.
Kevin Brent:And then eventually, the funds are available a full week later.
Leo Tucker:It's a delight. Yeah. So how does this tie in with buy now, pay later, BNPL, if you prefer the brevity? How does that actually shorter.
Kevin Brent:Yeah. I know.
Leo Tucker:How does how does that tie in, and how does that affect, the businesses, the customers, the whole, you know, supply chain?
Kevin Brent:So it's the same thing that sort of happened down the chain, but just pushing it down even further. Right? So Binapillator is just an intermediary. They're doing trade finance as well Mhmm. Where instead of you as the retailer offering this good on a subscription plan Mhmm.
Kevin Brent:And basically taking on the collection risk. Right?
Leo Tucker:Yep.
Kevin Brent:What you're doing is you're outsourcing it to Klarna or Affirm or whoever it is that's doing the buy now pay later, where they're going to give you the cash upfront and take on that collection risk from the end customer. Right? So, effectively what, trade finance intermediary is doing, no matter where that is in, in the sort of value chain, right, is that they're doing it for consumers. So we're talking in the scheme of global trade, microtransactions.
Leo Tucker:Yeah.
Kevin Brent:Right? You can buy now, pay later for something that's $300.
Leo Tucker:Yeah. 100 of 1,000 of dollar invoice. Exactly.
Kevin Brent:Yes. When you start talking about tens of 1,000 or 100 of 1,000 of dollars of invoice. Right? Well, then there's a much more serious collection risk. Mhmm.
Kevin Brent:And that's the reason that when I was talking about these smaller merchants not necessarily getting approved
Leo Tucker:Yeah.
Kevin Brent:Is, is because they do need to do that credit check and make sure that this merchant, has a very high probability Mhmm. That they will pay this bill in the 60 days that it becomes due.
Leo Tucker:Yeah. Yeah. I gotta manage that risk. Of course.
Kevin Brent:And so, so effectively, they they are carrying that. So you're able to to outsource that working capital requirement. It can speed up your collection Mhmm. And, and free up cash within your business.
Leo Tucker:And offset that that risk as well.
Kevin Brent:Yeah. Exactly. So and then the of course, the other thing, and this has been shown to occur with, with a buy now pay later, is that it does increase the average purchase size. Right? We call it average cart size in the ecommerce world.
Leo Tucker:But Because they can afford to buy a $200 item They can afford the
Kevin Brent:$200 a month or or the $50 a month for a $200 item over 4 months or however
Leo Tucker:that sort of looks
Kevin Brent:more palatable. Yeah. Yeah. Yeah. Yeah.
Leo Tucker:That's exactly it. So potentially increasing the number of customers you have and the average order value as well.
Kevin Brent:That's exactly it. Right? And that's the, that's the exact same reason that that wholesalers would give terms. Right? Is that, if you had to pay the cash upfront as the retailer, well, then it's literally, like, how much money have you made?
Kevin Brent:You know, how much cash do you have in the business? You know, know, all that kind of stuff. Again, it's that
Leo Tucker:working capital. In 60 days, I'll have much more capital.
Kevin Brent:Could have sold so much
Leo Tucker:more of this inventory
Kevin Brent:to be able to grow your business. You wanna have those terms in order to make sure that that cash is working for you.
Leo Tucker:Excellent.
Kevin Brent:And the wholesalers sell more, so they make more margin, and that increase in margin is offsetting the, you know, interest costs or the cost of the capital that is required to fund. Because effectively, what you're doing is you're you're kind of borrowing from that wholesaler for the duration of the terms of the, as long as that invoice is outstanding.
Leo Tucker:Right. And they but they cover the the cost of that. So if you sell a $200 item, your you as a small business get that $200 in your bank account straight away, and that's huge.
Kevin Brent:Absolutely. Right? And, I mean, depending on your market, you might you you sell a $200 item. You paid a $100 for it. Cool.
Kevin Brent:Well, you know, now you only have to sell half of it before you've completely covered that cost. And then the rest is, is your profit that you can use to reinvest, etcetera.
Leo Tucker:Any idea of how more popular the buy now, pay pay later services have become now that interest rates have tripled?
Kevin Brent:I think totally. What we've seen is that the incumbent companies have come in and made this an offering. And so, you know, there's a bunch of private capital, like, venture capital that has flowed flowed flowed into all of these buy now, pay later. And the idea is pretty decent, but if you're a one trip pony, it's pretty tough, to to make a business out of that with particularly because it is thin margins, there is that collection risk, there's everything else that's coming along. What's wind up happening is that you've got processors.
Kevin Brent:Right? So Shopify now has Shop Pay installments.
Leo Tucker:Right.
Kevin Brent:Right? And so that's an option. And so it's just one feature of their overall portfolio, right, that they can afford to take risk on. And if it doesn't work out that well, it's not existential. Yeah.
Kevin Brent:Right? You've also seen credit card issuers that are now creating an option right within where you can go and say, hey. I wanna change this big payment into installments.
Leo Tucker:Yeah. PayPal has it as well.
Kevin Brent:Yeah. Yeah. Exactly. Right? And so essentially, what we thought was, you know, this new category is really just a product that can be added to the product portfolio of these incumbents.
Kevin Brent:Right? So it is a bit worrisome from a stand alone.
Leo Tucker:That's interesting.
Kevin Brent:So buy now, pay later is is is, I think, here to stay. Right? But, all of the incumbents have figured out how to monetize it.
Leo Tucker:Right? Right. Not just these stand alone businesses where that is their only offering. Exactly. Oh, that's interesting.
Leo Tucker:So, Kevin, what's what's coming down the pipe? I wanna hear your hot take on what's new in finance, cash flow, working capital.
Kevin Brent:I mean, it's it's it it's tails as old as time with some fiddling around the edges. Right? But at the end of the day, you know, cash is king, and there's only one reason that a business fails. It runs out of cash. There's a multitude of reasons why it runs out of cash.
Kevin Brent:Yep. Yeah. There's there's no cash there.
Leo Tucker:It's pretty simple why, though.
Kevin Brent:Yes. But it all does boil it always boils down to that one thing. Right? And so, you know, the the industry has, always been creative, inventive on, cash management, etcetera, and continues to to to do so in terms of of different offerings, different payment methods, and and really speeding things. Right?
Kevin Brent:If if we're gonna talk about the future and things that are exciting, you know, there are a number of both, countries and international groups, projects, etcetera, that are exploring real time payments. So we have domestic real time payments rails in a number of countries that have launched or are being launched and and as well are looking towards getting, real time payment, for cross border transactions as well. Oh, that's huge. And so, basically, instead of waiting for the wire to hit, it's immediate. And so, again, talking about speed of cash flow.
Kevin Brent:Right? We're we've got these stretch and payables to 60 days, everything else. But even just the waiting for 24 hours or waiting over the weekend until the bank hour is open and that cash arrives. Exactly. That will speed up things as well.
Kevin Brent:Right? And when you start talking about large enterprise customers, all of a sudden, like, 2 days of sales could be 1,000,000 of dollars. Right? And so that can free up significant working capital as well.
Leo Tucker:Kevin, thanks for joining me today. Appreciate you coming on board and talking about our favorite topic, cash.
Kevin Brent:Thank you for having me. Alright. I really appreciate it, and, hopefully, it's entertaining.
Leo Tucker:Yeah. We'll get you on again. That's it for Business Over Borders. Like and subscribe so you don't miss any of our new episodes. We'll see you next time.
Voice Over:Brought to you by the reach network. Visit withreach.com/network for more.