Cash flow is king to almost every small business: it’s no use enjoying both growth and profitability if you can’t pay your bills. One of the most serious threats to your cash flow is late payment from your customers, and this remains a huge problem for SMEs.
In fact, a recent survey by accounting software specialists, FreeAgent, involving research into 50,000 companies, indicated that just 51% of invoices are paid on time.
Oddly, there was a significant regional disparity, with Sheffield companies suffering the most missed deadlines whilst businesses based in Manchester fared best. In fact, SMEs are owed a staggering £26.3 billion in overdue payments – but what effects can this have on them?
The problems of late payments
When you’re paid late, you struggle to pay your own invoices. One solution is to take out a short-term loan, which will alleviate the problem whilst increasing your company’s debt burden.
If this doesn’t solve the issue, you will have little alternative but to become a late-payer yourself, passing the problem onto your suppliers. This could lead to some suppliers severing their relationships with you, which can create a great deal of additional work and stress.
What’s more, paying late can damage your credit score, which in turn will restrict your access to borrowing, creating a downwards spiral. If the worst comes to the worst, you could find yourself with no alternative but to go into liquidation – even though you’re running a viable business.
But what can you do to fight back?
How to deal with the problems of late payers
One obvious solution is to adopt the carrot-and-stick approach to encourage your customers to pay faster. You are legally entitled to add interest, at 8% above the base rate, should your customers fail to adhere to your payment deadlines.
Of course, many businesses are nervous about doing so, in case they lose key customers, which is where the carrot comes in. By offering a small discount of, say, 5% for payment within a week you could significantly reduce delinquency.
Alternatively, if the worst comes to the worst, you may be better off without some of your most unreliable payers. Nobody likes to turn business away, but if a customer is seriously jeopardising your cash flow (even whilst boosting your turnover) you may do better to sever the relationship.
Finally, it’s vital to have your financial ducks in a row. A business line of credit acts like an overdraft, enabling you to borrow and repay at will, and can be extremely useful when dealing with late payments.
Alternatively, invoice factoring and discounting can tame a troublesome cash flow for good. These innovative solutions allow you to borrow against the value of your invoices, the instant you issue them.
At Cashsolv, we’ll lend up to 85%. Repayment is then made when your customers pay you. With factoring, we’ll assign experienced credit control professionals to secure early payment, thus minimising your charges, whilst with invoice discounting you retain control of your own debtor ledger.
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