The pervasive culture of late invoice payments in the UK is undermining the ability of small and medium-sized enterprises (SMEs) to grow and is even pushing some to the brink of insolvency.
Research from MarketInvoice, a business finance company, has found that 62% of invoices issued in 2017 by UK SMEs were not paid on time. That’s £21bn worth of payments that were made late. The average value of those invoices was £51,826, a figure that many SMEs would struggle to operate effectively without. Three in ten of the invoices that were paid late took more than two weeks from the agreed date to settle, with some taking up to six months to be paid.
Feeling the Effect of Late Payments
Clearly, late payment culture is having a serious impact on UK SMEs. However, it’s not just cash-flow shortfall businesses have to worry about.
1. Wasted time
SMEs are spending an average of three days every month chasing money they are owed, translating to £5,000 worth of wasted man-hours. Although time spent chasing payments is a means to an end, it’s time SMEs should not have to waste. Checking whether payments have been made, sending reminders and having those awkward conversations with clients all takes time that could be better spent on improving products, services and processes.
2. Bad debts
Late payments can easily turn into bad debts, which can be hugely damaging for a business. Bad debts make it difficult to pay staff, cause problems securing credit and lead to cash-flow shortfalls that threaten the very existence of a business.
3. Stunted growth
Late payments force businesses to focus on day-to-day activities such as credit control and collections rather than investing time and resources into the long-term growth of the company. When you don’t know when a payment is going to be made, it makes it difficult to spend money with any confidence. In fact, research has shown that the longer companies wait for a payment, the lower the level of investment they make.
4. Reduced margins
When profit margins are already low, late payments can be extremely damaging. This is particularly the case in industries like construction and manufacturing. Low-profit margins make it difficult to pay off debts and even take a salary as a company director.
5. Import and expert uncertainty
Businesses that rely on imports and exports can struggle to make purchases if their payments are not made on time. VAT payments also have to be made to HMRC regardless of when payments are received.
6. Increased borrowing and overdraft use
With cash-flow uncertain, SMEs can turn to expensive short-term credit facilities like overdrafts and credit cards to provide the working capital they need.
7. Director salary reductions
It is not uncommon for directors to go months without taking a salary from a company that’s struggling to make ends meet as a result of late payments.
8. Staff wage difficulties
Nothing is more indicative of a company with serious financial problems than one that is struggling to pay its employees. Business owners may use credit to make essential payments but this is not sustainable over the longer term.
What’s the solution?
Preventing late payments from clients and customers is easier said than done. However, there are a number of steps you can take to reduce the impact.
Recognise that late payments should never become ‘the norm’
You have to be prepared to be firm with clients who pay late. You are under no obligation to extend credit to anyone. If your payment terms have been discussed with and accepted by the client, then they’re in the wrong. With that in mind, you might choose to change your payment terms for those who can’t stick to the deal. Alternatively, you could charge interest on the late payment or even cut ties with the client altogether.
Change your process
Clearly, if you’re on the receiving end of consistent late payments, something needs to change. Automating the invoicing process by using cloud accounting software can reduce the time it takes to send invoices and remind you when payments should be made. You could also consider alternative payment methods. Direct Debit payments will provide more certainty, while card payment solutions can help you identify potential processing errors before payments are missed.
Build close and trusting relationships
Developing close relationships with your clients and trying to understand the challenges they face and how they operate can help to reduce chronic late payments.