An electronic payments software vendor is pitching a service that enables businesses to do something they typically have been unable to do: paying their bills early.
Xign Corp. says that most companies are eager offer business customers a discount for early payment, but according to its own research, most customers miss out.
The payment process at many large companies is so time-consuming that "most organizations are historically not able to qualify for early payment discounts," said George Fan, the Pleasanton, Calif., vendor's vice president of marketing and supplier services.
On Tuesday the company announced that it has started offering its Xign Network Insight service, which advises customers on how to make their processes more efficient and qualify for as many discounts as possible. This service will run in conjunction with Xign's payment network, which connects its clients with more than 30,000 suppliers and helps them keep track of when payments are due.
According to a study Xign released Tuesday, about 80% of suppliers are willing to offer early-payment discounts, and 25% of them do so now. The reason for the gap, the vendor says, is that so few companies can make payments early that many suppliers have no reason to offer the incentives.
Most suppliers ask that their invoices be paid within 30 days, and the typical discount is 2% for payments made within 10 days. These terms are generally referred to as "2/10 net 30."
"Companies want to drive savings to the bottom line," Mr. Fan said, and an electronic payments system "is a great way to do it."
The discount companies can get for paying their bills in 10 days instead of 30, when expressed as an annual rate, translates into a return of more than 36% on the company's cash, "which is far better than any short-term loans today," he said.
Xign's goal is for its customers to earn as much as 90% of the discounts offered by their suppliers, Mr. Fan said.
"With paper payments, most companies just can't" pay their bills fast enough to qualify, he said. In the traditional payment process, an invoice arrives in the mail and is forwarded to the appropriate department for approval. Once approved, it must be delivered to the accounting department, which cuts a check, which is mailed to the supplier.
"This process takes a long time," Mr. Fan said. "Historically, it takes 30 to 40 days," and it is not uncommon for the process to stretch out even further, especially if there are errors or complications.
Xign's network can sometimes process payments within three days, he said. Some companies have asked suppliers for an even bigger discount, 4%, for payments within three days, but such terms "are unusual, because nobody could do it, and nobody has asked for it."
Most suppliers would be happy to offer discounts, because getting paid sooner helps them manage their cash flow, he said.
Some major companies have hundreds of accounting employees handling payments, so automating the system would offer substantial cost cuts, Mr. Fan said. Companies typically spend $8 to $10 to process a payment manually, compared with $2 to do so with an electronic system.
Saswata Mukherjee, the leader for business excellence and strategy at the Oakland, Calif., health care company Kaiser Permanente, said it started using Xign's network in 2004. The investment paid for itself in 19 months through discounts and reduced processing costs, and it will pay for itself twice over within 24 months, he said.
Kaiser's initial goals for the network were modest, he said. "We want to pay our bills on time."
Historically, Kaiser has taken more than 30 days to pay the average invoice, and some took as long as 120 days. "Paper causes a lot of delays. It's a time-consuming and error-prone process."
Kaiser has not focused on earning early-payment discounts, but Mr. Mukherjee said that he plans to use the Xign software to make that a bigger priority this year. "We lose a lot of money because we cannot pay our bills on time, and that's revenue. It's not just savings - it's revenue that we didn't have."
The software can also keep track of details that enable Kaiser to be more aggressive in asking for discounts, he said. For example, if it can make a payment on the 20th day, it could request a prorated discount, or 1% off.
Corporate accounts payable departments are typically very large, and some companies try to reduce their expenses by outsourcing the work to countries with lower labor costs, Mr. Mukherjee said. "But this doesn't solve the problem. It's just spending less money to do it the same way."
Jeanne Capachin, the corporate banking research director at Financial Insights Inc., a Framingham, Mass., unit of International Data Group Inc., said corporate accounting departments are slow because they must reconcile the payments with the original order. Some companies handle the entire process manually, while others may have one automated system to handle purchasing and another for payments, she said.
"Companies either don't have systems in place to automate the payments, or they have systems that don't communicate with each other," she said.
For companies that can expedite their payments, the discounts can be significant, Ms. Capachin said. "That 2% is money in the bank."
