How are late payments affecting SMEs?

Late payments are something that businesses across the country suffer from and they can cause a great deal of stress for business owners. The general payment terms are 30, 60 or 90 days in which goods or services must be paid for however 90 days can seem like a long time to wait for customers to pay - especially if there are other payment commitments to meet.

Experiencing late payments whilst having other outgoing payments to meet can often lead to a ‘cashflow gap’. This can cause a great deal of stress and lack of productivity for a company, hindering opportunities to expand and win new business. An unexpected change in circumstances (such as a worldwide pandemic!) may leave a business in peril if they are not prepared for further payment delays. Although many businesses experience the worry of late payments at some stage, there are a number of sectors that are more susceptible to the problem.

Who suffers?

Services that generally have a long process tend to suffer the worst with late payments, such as businesses in the manufacturing, logistics, printing and recruitments sectors. Businesses in the retail sector tend to suffer the least, with faster payment terms and quicker turnaround. One example of a sector that struggles with late payment is recruitment. For example, a recruitment business may locate a candidate and place them in a role, but the paying company may only pay once the entire recruitment process is finished - meaning a huge delay for the recruitment business. Businesses can end up chasing customers for payments for up to three months but, if paid on time within that period, they could have instead secured new business, paid employees on time and met commitments to suppliers.

To smaller businesses, missing out on that one contract payment in the month can make a great deal of difference. It can be the difference to pay staff on time, hire that new employee, expand that product range - all of which can be hindered by that delay in payment.

The detrimental effect…

Late payments can have a detrimental effect on businesses. Not only can it disrupt development, new sales and expansion, it can cause these businesses to have a gap in their cashflow, damage their relationships with suppliers and create late payments for their own commitments. Away from the technical side, it can also be detrimental to the mental wellbeing of the people within the business affected, particularly if commitments cannot be met or if there is a shortfall in cash which disrupts employee pay.

How has the Covid-19 pandemic affected late payments?

The Covid-19 pandemic brought an array of challenges and with them came delayed and late payments. Businesses of all sizes and types experienced drops in demand, issues with their supply chain and, in some cases, full site closures. These changes caused a ‘ripple effect’ within many sectors as, once one business was paid late, all of the businesses within that supply chain then became effected.

According to research by the Federation of Small Businesses (FSB), 65% of small businesses supplying B2B experienced either an increase in late payments or had payments frozen completely as a result of the pandemic and 13% had payments terms increased.

How can SMEs manage late payments?

It can often feel like a losing battle when it comes to solving the late payments problem. A business may be doing everything it can to chase customers for payments but to no avail. Invoice Finance is designed to manage this problem and to plug the cashflow gap created by delayed payments for goods or services. It works by a businesses gaining immediate access to the value of their outstanding invoices instead of waiting 30, 60 or 90 days to be paid. Depending on whether Invoice Factoring or Invoice Discounting is chosen, the business has the choice of handing over the credit control responsibility to the Invoice Finance company or to continue to chase for payments themselves. This solution means that the stress of delayed payments is taken away and the business can continue as normal with up-front access to their hard-earned cash.

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