Late payments have always been a problem, but the current climate is making their impact much bigger. Without the payments they are owed, small and medium-sized businesses are left without the adequate cash flow to pay suppliers, which can have a devastating knock-on effect. For larger companies, meanwhile, it can wreak havoc on their balance sheets.
Studies have shown that late payments damage SMEs the most significantly, with UK SME late payment debt reaching a very concerning £23.4 billion at the end of 2019. In the wake of the pandemic, 20% of SMEs say that late payments have reached an all-time high over the last 12 months, while 64% fear that late payments resulting from the pandemic could result in their business going under in the near future.
Besides stunting a company’s growth potential – with late payment expenditure cutting heavily into investment resources – the true cost of late payments can seep into every other corner of a business too. In fact, it’s not just the wait for the payments themselves, but the expenses they accrue in their own right.
As a business, paying money to recoup money is simply not a sustainable model. With many SMEs spending in excess of £500 every month just to handle late payments (ignoring the knock-on effects above) there is evidently room for improvement.
Rights - Check your payment terms and you might be surprised to learn that you can charge interest on all B2B late payments. Of course, this is perhaps not an avenue you’ll wish to go down if you’re on relatively good terms with a client and they are only a little behind on their payments, but if this is a regular occurrence or a payment from a new client you have no reason to trust, this could be the best course of action.
Research - You should always ensure you’ve done your due diligence before making a contract with any client, whether on a B2B or B2C basis. For businesses, run a check with Companies House to gain some valuable insight into their payment histories with other clients. For individual customers, meanwhile, things are a little bit more tricky, but thanks to the advent of AI and machine learning, not to mention more advanced debt collections software solutions, it’s never been easier to dig into a person’s financial past.
Credit - With better research under your belt you’ll be able to maintain more effective credit control and more effectively stay on top of later payments. Conversely, you could consider setting up Direct Debits with your clients, taking the impetus to pay out of their hands, and putting it in the hands of a reliable third-party financial institution. To ensure your own credit remains solid, meanwhile, speak to your bank or financier as soon as possible if you’re having worries: the longer you leave it the fewer options will be available to you.
Clarity - According to Damian Baker, Manager of Business Process Solutions at the South African-based accounting firm SNG Grant Thornton: “Delayed payments have a direct impact on working capital and can severely constrain growth capacity. That's why it’s crucial to set out your payment terms, invoicing dates, and due dates in contracts from day one to eliminate ambiguity.” What he’s referring to here is a level of clarity with all contracts that leaves no wiggle room. Because it’s that wiggle room that could be used to shirk payments without reproach. Of course, this will all run a lot smoother if you can agree on the terms in advance. This way, many late payment disputes can be solved before they even begin.
Even with so many SMEs struggling before and during the pandemic to chase late payments, only 11% said they used any form of accountancy or debt collections software.
Debt collections software not only eases the burden of invoice chasing but also manages debt collections in a practical and logical way, using complex algorithms to determine which payments to chase depending on their size, gravity, and how likely they are to repay. It’s an affordable and endlessly scalable solution that is easy to overlook. So, if you’re still stuck in the dark ages of Excel spreadsheets, it could very well prove to be the missing link in your late payments strategy.
At the beginning of 2020, the average small business was chasing at least five outstanding invoices and wasting at least 90 minutes per day on chasing those invoices. COVID-19 has undoubtedly only made things worse. But there could be a real-world solution that solves many of the problems and costs associated with late payments – a solution that might help course-correct the damage done by COVID-19.