There are many problems that can crop up when running a business, especially when you work B2B. Whatever sector your company is based in, one of the main problems is the threat of late business payments from customers and clients. When working with suppliers and hoping to grow the business it can sometimes have a devastating effect.
Late payments to your business will have a big impact upon cash flow finance and see your company struggle to get by, which is a big worry for SMEs. Thankfully, there are a number of solutions and actions your business can take to minimise the threat and impact of late payments.
Threat of Late Payments
According to recent research, 62% of UK SME’s invoices are paid after the due date. Of these, 20% aren’t settled until two weeks after they are due, as the problem for British businesses specifically seems to be getting worse. Thousands of SMEs go under each year due to poor cash flow finance, and late payments are a large contributor to this.
The threat of late payments has a negative impact further down the supply chain. If your business is not paid on time, it may not have enough capital to pay suppliers, leading to a breakdown in the relationship. Or the money will be scraped together, but this leaves not enough to reinvest in other areas of the business to grow and expand. The threat of late payments for SMEs is very real and one that needs to be tackled.
Enforce Payment Discipline
Start off on the front foot by enforcing strong payment discipline to cut down on the chances of future problems and having to finance invoices. Put in place a good collection process, assigning one team member the role of looking after invoice payments.
Analyse the existing system including how long it is taking to get paid, resolve disputes, a resolution policy and the contact you have with clients. Work on these findings to create a more efficient payment model, which could involve removing discounts for late payments or capping their next order if the lateness continues.
Ways to Improve Cash Flow
A disjointed cash flow is the major way late business payments will affect your company, so if you do find problems with late payments there are various options to ensure a good cash flow is maintained.
Increase Payment Options
Depending on the type of business you run, clients may find it easier to pay by card or cash rather than traditional invoicing practices. Encouraging the use of credit and debit cards for payment, where appropriate, will definitely speed up the money going from your client’s account and into yours. There are a number of ways to install electronic payment technology in your business.
There are two main ways to finance invoices; invoice factoring and invoice discounting. Both involve your business receiving the amount owed by invoices up front, at a small discount, before your clients pay up. Invoice factoring works by a third party taking control of the invoices owed, including collection, so clients are aware the practice is going on. While with invoice discounting your clients will still pay directly to you and are unaware of the third party.
Offer Continuity Sales
Offering deals to customers who buy for a set period of time or for a fixed discount is a good way to keep your cash flow finance ticking over. Think of it as a subscription. The client pays up front so you get the money immediately to help sort out cash flow, while they receive a nice discount. It can also draw in more business for your company.
Protect Your Business
There are a few more steps that can be taken to protect your business against the worst cases of late payments. Depending on the type of business you run, one of the first things that should be done is creating a contract between you and the client that stipulates when they must make payments. This should stop incredibly late payments being made.
Business insurance is another essential you need, which will help protect your company in the worst case scenarios; such as clients refusing to pay. Occasionally a customer may fold or go bankrupt, which will still negatively affect your cash flow, so business insurance should help cover this.
Hopefully this will help your business be protected against the threat of late business payments and its negative affect on cash flow finance.
Image courtesy of iStock.