Commentary: Transportation payment in the bank
The definition of “carrier” is pretty straightforward: an entity that transports freight. Carriers are in the transportation business, plain and simple. Actually, it’s not so simple. Carriers are also in the credit business. Unintentionally, to be sure, but they are. When carriers set payment terms of 45 days, they are essentially extending credit to the shipper for a month and a half.
From the shipper’s standpoint, those delayed payment terms are necessary, even critical, to maintaining cash flow in a competitive marketplace. That’s understandable, but so is the fact that many carriers would love to get access to the payment earlier if they could. How can shippers and carriers bridge that divide? How can shippers keep enough cash on hand for their operations even while carriers get paid faster if that’s what they want? The answer is simple: by using a bank to facilitate the transaction.
When a bank is the transportation payment provider, both shippers and carriers can benefit from the sort of trade finance arrangements banks make every day. A shipper can still take 45 days to pay, for example, but the carrier can get paid as soon as the shipper approves the invoice. Leveraging trade finance removes a potential friction point — longer payment cycles — from the working relationship.
Speed of payment is only one part of this critical business transaction. The process of freight payment as a whole can be quite complex, as invoices and payments get audited, adjusted and verified before being paid. This complexity has spawned numerous audit and invoice processing solutions from myriad providers. Among these many alternatives, a financial institution provides uniquely powerful advantages for dependable, secure, cost-efficient payments.
Moving funds is what financial institutions do. No other organization can offer the level of payment reliability that a bank can provide. In fact, a bank is the only entity that can make a payment directly on a shipper’s behalf. If the shipper’s provider is not a bank, that entity works through a bank to make those payments.
Most shippers closely monitor the safety of their physical supply chain — some have been known to fire a carrier for a single violation of federal Compliance, Safety & Accountability (CSA) standards. That same care should be applied to a shipper’s financial supply chain. Recent high-profile litigation should highlight the need to carefully consider a freight payment provider’s financial stability, its risk of defaulting, the visibility it offers into its payment process and the degree of control it exerts over funds. Ultimately, the only institution that can guarantee funds will be delivered exactly when promised, to whom promised, is a bank.
Financial institutions are closely regulated in the way they manage their funds — and those of their clients. By law, they do not, for example, commingle a shipper’s funds with those of other customers (meaning they can’t borrow from Company Peter to cover a shortfall with Company Paul). When a bank manages your payments, creditors can be more confident they will be paid in full and on time.
Like most large organizations, banks are required to comply with safeguards, like Sarbanes-Oxley and Office of Foreign Assets Control checks. Few can rival their proficiency in complying with such regulations. In many cases, working with a bank relieves a shipper of having to conduct its own regulatory compliance exercises, because the bank will be doing it anyway for its own purposes.
A shipper who makes an inaccurate payment has to spend time tracking and reconciling — a tedious and stressful process under the best of conditions. When a bank handles invoice management and payment, invoice questions are addressed up front before payment. Payment won’t be sent until shipper and trading partner agree to the amount — saving time, money and headaches. A cost-efficient invoice management and payment system allows trading partners to work collaboratively online to adjust invoices, agree on a final amount, and authorize payment. To pay for post-payment audits to catch inaccurate payments caused by incorrect invoices is to spend money unnecessarily.
Similarly, a carrier getting paid by check is letting someone else use their money to generate income from float. Even getting paid electronically through automated clearing house (ACH) can, if it’s not coming directly from a bank, take longer to reach the carrier than it needs to. That’s because non-bank freight and audit payment providers (FAPs) have to work through a bank to generate that ACH payment — they can’t do it themselves. The extra steps add up to extra days.
In looking for ways to sustain strong relationships with carriers, faster payment is a good place to start. Shippers that consider the carrier’s needs when choosing an invoice management and payment solution create true end-to-end efficiencies and savings for both parties.
When a bank provides the invoice management as well as the payment, both shippers and carriers benefit. Shippers know that invoices are being processed with high efficiency and low cost, and payments are being made reliably, securely and quickly. Carriers can depend on faster payment, which gets them out of the money-lending business and enables them to be what they want to be: carriers.
Freight payment global relationship team lead,
San Antonio, Texas
Lead business development executive,
Elavon Freight Payment