The Impact of late payments from customers

According to a report published by accounts software giants Sage in December 2017, the statistics on company invoices being paid late are staggering. Amounting globally to a colossal 3 Trillion US$ worth of overdue invoices. Sage reports that 1 in 10 invoices are paid late and that the UK is the late payment capital of the world with 18% of invoices paid late and around 9% of invoices becoming bad debt.

Why is late payment a problem?

Cashflow is the lifeblood of any business. It costs money to hire premises, pay for rates and utilities, buy materials, pay salaries and countless other overheads. With times being so tough, few businesses have the luxury of having large cash reserves. Many businesses have to borrow money from banks and other financial institutions which comes at a cost.

Most businesses have to purchase materials and pay wages and overheads before they can invoice for the services they provide or sell the product that they make. Where credit terms on an invoice are exceeded and bills paid late, the business can be left in real financial difficulty through no fault of their own.

Shouldn’t businesses be able to deal with a few late payments?

A good cashflow strategy will doubtless make the effects of late payments more manageable. However, it’s worth pointing out that by failing to pay on time, a business or individual is failing to honour their side of a deal. The nature of business is that one side agrees to perform the service or supply the goods, the other agrees to provide money in return for this by an agreed time. It would be completely unacceptable to withhold an employee’s salary past payday, there are penalties for paying tax late, but there seems a curious acceptance that late payment on a business invoice is fine.

Late payment disproportionately affects smaller businesses

Larger firms are likely to have resources committed to credit management, they’ll have teams and systems dedicated to ensuring that their own invoices are paid on time by their own customers. Even though they’re likely to have reserves in the form of cash and available credit, they’re less likely to have to draw on them and have such a large customer base that upsetting a few by hounding them for payment isn’t such a great concern.

Compare this with smaller businesses for whom chasing unpaid invoices takes away time they could be spending on running the business. Every customer is important to smaller businesses so directors can be reluctant to risk ruining a relationship by chasing late payments. It can certainly be the case that the very businesses that can least afford to be paid late are the ones most likely to have to bear this burden. Unfortunately, it is often the larger businesses who are the worst offenders when it comes to paying their smaller suppliers late.

Late payments can and do push businesses into insolvency

With operating costs being higher than ever, there will eventually come a point where a struggling small business has exhausted every means of funding while waiting for overdue bills to be settled. When this happens, there’s a very real risk that the company will go out of business.

A cash starved small business can try to survive by taking more extreme measures to maintain a degree of liquidity. For example, by putting off hiring new staff or investing in new equipment at the cost of growth. Directors may even resort to more costly or risky methods of funding. Some even remortgage their homes. They could reduce staff hours to cut employment costs, but there’s a chance they could lose their best staff who need those hours. They may end up unable to pay their own suppliers and risk late payment fees or reduced credit terms.

Ultimately, too many unpaid invoices will result in even a well run, otherwise profitable small business being forced to close.

What can be done?

In a perfect world, everyone would pay on time, but if you or your business are struggling financially due to late payment or non-payment of invoices, then get in touch with us to see what we can do to help. The sooner we’re on your side, the sooner we can help and the more likely we’ll be able to save your business.