Next Day Funding

In the previous article, we have already studied how commercial banks help in providing point-of-sale services to their corporate customers. We have also studied how point-of-sale systems have become strategically important for corporations. However, they are some pain points in the point-of-service system as well. Commercial banks provide another service called next-day funding in order to help overcome some of these issues which result from point-of-sale systems.

What is Next Day Funding?

In order to understand the benefit of next-day funding, we first need to understand the problems which are faced by businesses with regard to the collection of payments. We already know that a large number of transactions happening inside any store are electronic transactions. This means that most of these transactions happen via debit cards, credit cards, or mobile wallets.

Now, when transactions are conducted electronically, the merchant does not receive payment immediately. The payment processor or the commercial bank generally holds on to the payment for a few days in order to help mitigate risks. Hence, merchants receive their payments only after three to four days after the transaction has taken place. This means that a significant portion of the daily revenue is locked up. This means that the working capital requirement of the company also goes up leading to an escalation in costs.

As the name suggests, next-day funding is a service provided by commercial banks to their clients where they shorten the timespan for receiving payments. Instead of waiting for three to four days in order to receive payments, corporations can receive the payments on the very next business day. The ability to expedite the reception of payments helps in reducing the credit to cash-cycle.

Factors that Affect the Next Day Funding Service

The next-day funding service is an important service provided by commercial banks. However, there are a couple of factors that need to be taken into account to ensure that the service provides the desired results.

The details of these factors are as follows:

  • Cut-off time: Firstly, every next day funding service has a cut-off time. The cut-off time is important since only payments received before the cut-off time are considered for next-day settlement. Hence, if the cut-off time is 10 PM, then only the payments received before 10 pm are paid on the next day.

    If the cut-off time is too early, then the number of eligible payments gets reduced. This is because of the fact that empirically most of the sales in retail stores tend to happen during the evenings. Hence, companies must carefully consider the cut-off time and how it impacts their business before they decide on which commercial bank to choose for providing next-day funding services.

  • Fees and Charges: Also, since next-day funding requires priority processing by the banks, many banks charge a fee when they offer this service to their corporate customers. This fee is reduced drastically if the volume of transactions is very large. It is important for corporations to consider the cost of this service as opposed to the benefit that they will derive from it.

Benefits of Next Day Funding

Next-day funding is popular amongst businesses because of the several benefits that it provides to business users. Some of the benefits have been mentioned below:

  • Better Cash Flow Management: The first and most obvious benefit of next-day funding is that the cash flow cycle of the business improves. It is very important for businesses to have a shorter cash flow cycle since it allows them to manage their working capital with fewer funds. Hence, next-day funding saves companies from additional interest costs which they may have to pay if their cash flow cycle is not optimized.

  • Faster Payments to Suppliers: Next-day funding helps companies develop better relationships with their suppliers. This is because of the fact that the company can receive its funds faster which allows them to pay its suppliers faster. The end result is a better relationship with suppliers which allows the company to have a more stable supply chain.

  • Access To Discounted Prices: Suppliers tend to build in interest costs in their product prices. Hence, if companies have longer payment terms, they tend to get products that are priced higher. Next-day funding allows companies to pay their suppliers faster. As a result, suppliers are willing to reduce costs which helps improve the overall bottom line of the company.

  • Easier Reconciliation: Last but not the least, next-day funding makes the process of reconciling payments quite simple. Since the payment data can be matched with the sales data from the previous day, reconciliation becomes quite easy. This timely availability of data allows for the automation of the reconciliation process which further allows the reduction of administrative costs and helps improve the bottom line of the company.

The bottom line is that next-day funding is an important feature and is very useful for companies if it is reasonably priced. There are faster alternatives such as same-day payment also available in some developed countries. However, these payments tend to be quite expensive which makes them unviable.

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Commercial Banking