Editor’s Question: How can SMEs alleviate cash flow pressures caused by late payments?

Editor’s Question: How can SMEs alleviate cash flow pressures caused by late payments?

In uncertain economic times, small businesses are being squeezed from all sides. Alex von Schirmeister, Managing Director, UK & EMEA, Xero, explains hows small- and medium-sized companies can cope with late payments. He said: “Late payments – alongside high inflation and energy costs – continue to create cash flow issues for the small business economy. While inflation is outside of our control, late payments are a fundamentally cultural issue that continues to put pressure on small businesses. And it’s only getting worse.”

According to Xero’s Small Business Index, the average time taken for small business suppliers to be paid rose by 0.6 days to 30.5 days in February. On average, these payments were made 1.8 days beyond the agreed payment terms, an increase of 1.8 days since December. This is the highest level since August 2020, reaching the heights of the first lockdown when payment times soared. It demonstrates a reversal of a steady improvement in both metrics since 2017.

Von Schirmeister said: “For smaller organisations, a healthy cash flow isn’t a nice-to-have – it’s a fundamental necessity for the survival of the business and the owner’s well-being. In some scenarios, it can be the difference between profitability and administration.

“While late payments remain an everyday reality for small business owners, there are some processes they can put in place to help alleviate cash flow pressures and minimise payment delays.”

He explains how business owners or finance leads must have easy access to company accounts. What’s most useful is a clear snapshot of numbers in real-time, to ensure they’re in the best position to spot cash flow problems as soon as they arise.

Von Schirmeister added: “Digital platforms can help with this – collating invoices, payments and expenditure all in one place. Having this real-time data can help small businesses identify the worst ’late payers’ so they can better predict delays and address the issue with these suppliers. These tools can also automate follow-up for late payments and provide multiple payment options.”

He said that secondly, businesses can better protect themselves from late payments by putting penalty systems in place and clearly communicating their policies in upfront payment terms.

He added: “Finally, it’s important that small businesses choose their customers wisely. It might feel counterintuitive to be picky in the current economic climate – surely any business is good business, right? However, it’s a good start for small businesses to check the credit scores of new and existing clients. A poor credit score could be a red flag for late payment problems in the future.  

“Small businesses can take some steps to protect themselves, but real change can only come in the form of tangible policy change. Late payments are costing small businesses in the UK an estimated £684 million per year. With these stark figures in mind, the UK government’s Late Payment Consultation cannot come soon enough.”

Terry Corby, Founding CEO, Good Business Pays CIC:

Cash flow is a critical aspect of any business. SMEs suffer fastest and most when cash starts to run low. The problem is getting worse.

Late payments put unnecessary and unfair pressure on SMEs, affecting their ability to pay suppliers, meet payroll and invest in growth opportunities. To alleviate these pressures, SMEs need to adopt strategies to manage cash flow effectively. SMEs should not have to worry about waiting for payment, but there are ways they can alleviate cashflow pressures caused by late payments:

Implement credit checks to find out which customers pay on time. Credit checks avoid taking on customers with a history of late or non-payment.

Invoice promptly and accurately to avoid any delays in payment. Invoices should clearly outline the payment terms, due date and any penalties for late payment. Pay close attention to the address and contact names on your invoice as inaccurate or incomplete invoices can delay payment.

Negotiate payment terms with your customers to receive payment on time. If you can, negotiate for upfront payments, even with corporates who don’t normally offer this option. This may not always be possible, but introducing payment terms, including a proportion up front, can significantly mitigate cash flow issues for small businesses. This is especially the case in sectors where high initial costs can sometimes make it impossible for businesses to accept work.

If you can’t negotiate upfront payments, request that customers pay within 30 days of the invoice date, rather than the standard 60 or 90 days.

If it works for your business, offer discounts for early payment,incentivise customers to pay early by offering discounts. Offering a small discount if a customer pays within ten days of the invoice date can encourage customers to pay early and improve cashflow.

Use factoring or invoice discount. Factoring or invoice discounting – selling unpaid invoices to a finance company that provides you with an upfront payment – can help access cash quickly, even if your customers take a long time to pay.

Invoice for interest using the newly revised calculator on the Small Business Commissioner’s website. Invoicing for interest is an important right businesses have in protecting business income.

Cashflow is critical to the survival and growth of small businesses, and late payments put immense pressure on finances. Use a mixture of ways to alleviate these pressures, depending on the nature of the business and outgoings.

Vicki Taylor, Director of Debt Finance, Growth Lending:

SMEs are experiencing unprecedented strain on cash flow, with the rising cost of doing business, geopolitical uncertainty and soaring inflation exacerbating challenges, and late payments only adding further pressure. Growth Lending’s Don’t Bank On It report found that almost three-quarters of SMEs experience late payments from their customers, with one third being paid late on at least a monthly basis.

Of those SMEs that experience late payments from customers, more than two-thirds (67%) have at least £50,000 tied up in late payments. Moreover, 30% of those experiencing late payments from customers are owed between £50,000 and £100,000 and most shockingly, almost one in ten (9%) have more than £1 million of capital unavailable as a result of unpaid invoices. This means that businesses are unable to access this money to tackle rising energy costs, combat soaring inflation or fund growth.

If SMEs are struggling with late payments, there are ways to alleviate the cash flow headache. Invoice finance, either whole turnover or selective, is one solution to release cash which is tied up in invoices. Some lenders also offer international invoice finance, which is specifically aimed at firms with debtors in currencies such as USD or EUR.

Aside from seeking funding to alleviate the impact of late payments, SMEs could allocate additional resource to credit control to help collect older debts and tidy up any administrative issues that may be causing delayed payments. Streamlining invoicing and payment processes will help to make them more efficient, meaning the customer is more inclined to pay on time and the business can easily keep track.

It is also wise for business owners to take out credit insurance, or bad debt protection, to mitigate against the risk of non-payment. Carrying out a credit check prior to taking on a new customer or client can also provide insight into whether late payments are likely to be an issue. Some businesses may also choose to implement late payment penalties to encourage clients to pay on time.

Our research found that nearly half (49%) of SMEs are unaware of invoice finance as a form of funding. This means that a huge number of businesses could be missing out on an opportunity to alleviate cash flow pressures, and secure the capital required to tackle rising costs or pursue growth ambitions. Education is needed to increase awareness of the options available to SMEs struggling to shoulder the burden of late payments.

Moses Abindabizemu, Chief Marketing Officer, Cellulant:

In challenging economic times like the one we’re in today, receiving payments in good time can be the difference between a thriving or a dying business. Late payments disrupt cash flow, are stressful and time consuming to follow up and may stifle growth to insolvency.

Late payments disproportionately impact smaller businesses, as larger enterprises have more power to dictate payment terms. Additionally, a payment delay is more disruptive to small business operations.

SMEs can leverage technology and digital payment platforms for timely payments.

Technology is pivotal in driving better business outcomes for businesses of varying sizes. Here are some solutions that small businesses can consider to increase their chances of being paid on time:

  1. Diversify payment offerings

The COVID pandemic accelerated the adoption of digital payment methods, from mobile payment apps to contactless payments. It led to changing preferences in how consumers and businesses wanted to make payments. Therefore, align yourself with the changing times and provide your customers with multiple payment options such as card, direct debit or mobile money. Offering digital payment options will enable you to receive all your collections in one settlement at a guaranteed time, mainly if you use one payment service provider for all your digital payment options. For customers based in a different country from yours, ensure you accept payment in their local currency for a faster turnaround time on settlement.

  1. Invoice creatively

If you offer services to corporate customers that pay after some time, whether weekly, monthly or quarterly, create different payment options that allow the corporate to pay you conveniently. Some options could be (a) an invoice with a link to pay, (b) if you operate in multiple geographies, utilise a payment aggregator which can collect the payment on your behalf from multiple currencies and deliver it to your preferred local currency, or (c) create a pricing model that incentivises early payment of invoices. If the standard payment is 30 days, you could offer a 2-5% discount if a customer makes the payment in a week. For example, a business in the retail sector can recover this discount if the money rotates in the three weeks you have saved.

  1. Explore the use of data for working capital financing

Sometimes you need to get short-term working capital to keep your business running as you wait for your outstanding invoice. SMEs that utilise a digital payment processing platform can leverage their payment data for insights that offer a deeper understanding of their business’s financial health. This data can help you access non-collateral loan offers promptly, precisely when needed, overcoming the constraints of access to capital many small businesses tend to face.

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