The cash-crunch crisis
In the aftermath of the financial meltdown, an economic stimulus package of more than $800 billion was passed.
Debate the results or the wisdom all you want, but what if we could add over $2 trillion to the U.S. economy–all of it from private money? More than 2 trillion dollars: That’s roughly how much money businesses owe to other businesses at any given moment in the U.S. according to an industry report.
Every year, thousands of cash-starved small businesses go bankrupt waiting to be paid on invoices they were owed, often by far bigger, and successful/long-standing companies. And that just really bugs the hell out of me.
Come on: No invoice, anywhere, ever should have to take 90 days to be processed and paid, not in this era of Big Data and the cloud and globe-spanning fiber-optic cables and high-speed AI credit algorithms. But business processes are stuck in the past, as I lamented here.
It’s easy to paint this as, “Oh, these are the big companies being bad to the small companies.” But it’s nobody’s fault. No CFO wants to be a jerk here. The tragedy is that it’s not something either side wants. When a supplier goes bankrupt, that’s a huge cost, a strategic risk to the bigger company. Neither side gains from it.
The Late-Pay game is a time-honored practice for hundreds of years: 30-60-90 days, if you’re lucky. Businesses stretched out payments and delayed payments as much as possible, because the payment process was very hard to complete quickly due to antiquated business solutions and obstinate technology.
But the cash crunch has gotten a lot worse because of how businesses—especially large businesses—reacted to the financial crisis. Since 2008, they have been rewarded for having a lot of cash on the books.
That sets off a confrontation between parties that need cooperation to succeed – not pitting business against business, customer against supplier, partners against each other.
By delaying payments, you’re increasing the amount of cash you have, but it is generating this huge problem, whereby those delays are leading to bankruptcies in small businesses, resulting in lack of growth. Thus, companies aren’t creating as many jobs and hiring as fast as they could be.
And when you start to look at it in its totality, it is literally trillions of dollars that are locked up in this whole game.
Over the course of a year, the unpaid bloat totals more than $2.4 trillion in floating payables in the U.S. alone, according to some studies. The bills sit, unpaid and wasteful and idle, as the businesses that are owed the payments end up acting as the de facto financers for their biggest customers. Interest-free financing, no less.
There has to be a better way, a cleaner and more efficient way—and we at Tradeshift think we have discovered it.
Thousands of large companies and their suppliers are joining our open, Internet-based commerce community, transacting hundreds of millions of dollars in business with one another, every single month.
We are storming the back-office, revving up billing practices in use since the 19th century and renewing and reordering them with new tools of the 21st century: open-source code, user-created apps and a new level of real-time transparency about your orders, your customers, your suppliers and your partners.
The revolution is nigh, and next up, we look at the many upsides.