Payment Optimization: It’s Time to Think Beyond the Check

Cash flow is all about optimizing payments for your business: You want customers to pay quickly, and you want to time your payments to suppliers and vendors so you hold onto your cash for as long as possible.

In this equation, even minor improvements in the efficiency of payments can make a big difference in business cash flow. It can reduce short-term borrowing needs and help a business hold on to cash longer while attaining greater visibility and control of payments.

Early in the pandemic, One House Bakery owner Hannalee Pervan had a seemingly enviable problem: A flood of orders. So many that she had trouble processing them, which delayed and complicated turning all those orders into cash to run her business. One House quickly said good-bye to taking orders by hand over the phone and joined the migration to digital payments.

The digital payments trend is accelerating. Fifty-three percent of merchants intend this year to expand payment methods—ranging from digital invoicing, QR-code payments, and digital wallets.

Despite the rise of new consumer-oriented digital payment options, many businesses still rely on manual processes, paper checks, and wire transfers. These legacy options are becoming more costly and inefficient. Digital payments can help businesses improve cash flow, reduce costs, and increase efficiencies by accelerating receivables collections, providing more flexibility in making payments, and improving liquidity at a lower cost.

“It’s all about the cash conversion cycle,” says Claudia Bodan, Los Angeles Regional Manager at Bank of the West. “How can businesses quickly collect funds—cash, credit card, ACH, wire, or checks—from clients, deposit funds into their accounts, and hold onto those funds as long as they can until they have to pay them out?”

Just prior to the pandemic, six in 10 businesses said they struggled with cash flow, and nearly a third said they had been unable to pay vendors, employees, or themselves due to cash flow issues. When the pandemic and lockdowns hit in early 2020, the payments world was turned upside down.

The Pandemic’s Impact on Payments

Shutdowns in early 2020 forced many companies to test and adopt technologies and payments they might not have otherwise. For example, when employees suddenly were forced to work remotely, many businesses’ payment systems were ineffective because there wasn’t anyone in the office to sign checks, says Steven Martinez, San Francisco Regional Manager at Bank of the West.

“Businesses had no choice but to adopt new technologies and methods,” Martinez says. “As a result, they’re looking for automation or more efficient methods for accepting and making payments.”

Among the most popular methods for businesses to accept payments during the peak of the pandemic was credit cards. Whether for e-commerce, phone orders, or mobile-based payments, credit cards allowed companies to serve customers in remote and touch-free environments.

As the economy has normalized, businesses should understand that the card option can come with the trade-off of higher costs. With average processing fees ranging from 1.3 to 3.3 percent, businesses should weigh these potentially higher costs and talk to their financial partners about options. Payment processors can offer a variety of solutions that help reduce or offset the cost of card payment acceptance, so businesses can take advantage of the added convenience and access to customers taking card payments provides.

Beyond common payment methods of cash, checks, and cards, many companies have had to find other payment methods since the start of the pandemic.

One notable trend has been a significant shift to ACH payments in business-to-business transactions to increase convenience and reduce expenses. ACH is faster than paper checks yet less expensive than credit cards, with a median internal cost of only 29 cents per transaction. Indeed, B2B usage for vendor payments, bills, and other transfers using the ACH system experienced record growth, increasing 11 percent to $4.4 billion in 2020.

P2P payment platforms have gained a solid foothold among small businesses. In a recent survey, 82 percent of small businesses said they accept at least one form of P2P payment. Some businesses are starting to explore digital payment options like Zelle^®, which many business owners already use in their personal lives. Some banks even offer their own versions of these P2P payment platforms with the benefits of ACH, without the downside of processing times, Bodan explains.

Even with the rush to digitize payments, checks may still have a place for some businesses and some payments. In fact, 81 percent of businesses still pay other companies with paper checks. Some may find that it’s most effective to issue checks for regular low-volume payments like rent, while ACH is a better option for regular receivables.

There are also cases where businesses may benefit by making a payment with a rewards or cash-back card.

Designing Your Payments Strategy

Having a menu of payment options may be the best approach for many organizations. A framework to analyze options can help businesses find the right mix.

Business owners can look to their banker for advice. Payment processors like Elavon (which works closely with Bank of the West) can help businesses find payment solutions that meet their needs with a one-stop-shop for everything from credit card processing to ACH and mobile payments. Also, business owners should ask their merchant services provider if they provide same-day settlement, which can improve cash flow.

Having options and a means to identify the best payment methods for various situations can help businesses manage their cash and reduce costs.

“All businesses want to go digital and automate, but that comes at a price. It’s a matter of understanding their cash collection system and diagnosing the roots of their issues and their pain points,” says Bodan.