As a small business owner, cash flow is your lifeblood. It keeps you ticking over, allows you to grow your company and cover essential overheads.
So, when clients don’t pay on time, it can seriously impact your ability to carry on as usual.
Late payments have become an absolute catastrophe in the UK with over 50,000 SMEs shutting their doors each year due to slow payments.
Recent research shows that small suppliers are more likely to be paid later than their larger counterparts. Small companies are often paid more than 30 days late, while large companies with high costs receive their payments on time or only a day late.
Buyers often don’t process invoices under £10,000 p.a till 35 days after receiving the initial invoice, which means that payments with net 30-day payment terms are late before they’re even approved.
Why are Invoices Paid Late?
We all know the situation far too well. You’ve completed a big project for a well-known brand — a brand with an annual turnover well over 1 million.
You know you have the funds to pay you, but days and sometimes even months pass before you FINALLY receive the outstanding invoice.
While it’s easy to point the finger, this situation isn’t as clear cut as it may look. Late invoices result from a wide range of factors as well as the general culture around chasing outstanding payments.
Outdated Payment Processes
While many B2C companies have adopted innovative payment methods, like Apple Pay, many B2B payment processes need updating.
Long, drawn-out processes involving multiple stakeholder sign-off, purchase orders and budgets, making it almost inevitable that invoices are processed late.
More often than not, this process is managed manually as only parts of the payment processes are digitalised. 52% of B2B payments are made through bank transfers and 50% of global business transactions are still done on paper, which further draws out the processing time.
Outdated payment processes slow down the process, but also create additional costs of wasted admin time as well as unpleasant conversations with clients when chasing payments.
Poor Payment Terms
Studies show that inefficient payment terms result in almost £250 billion of late global payments or bad debt, every year.
Payment terms, typically included in your contract, explain when you expect to get paid. Most companies (54%) have payment terms of 30 net days, while only 14% of SMEs have payment conditions over 61 days.
However, larger companies are more likely to give lengthy payment terms with some well-known corporations having payment terms as long as 120 days!
With most B2B projects, suppliers have to front costs upfront, complete the work and then wait for their payment. When payments are late, this only compounds the issue and makes it hard for SMEs to stay open.
Lack of Communication Between Suppliers & Customers
When it comes to late invoices, one of the fundamental, underlying issues is the lack of transparency and communication on the market.
Many SMEs feel ‘awkward’ or ‘rude’ following-up on late payments as 77% said they worry about damaging client relationships and 76% thought following up would hurt their chances of getting paid at all.
On the flip side, many companies don’t realise the importance of paying on time and don’t have a reason for paying invoices late.
To create more clarity and better communication, the UK government recently launched a Duty to Report. This initiative requires large companies to publish their payment terms, which allows SMEs to understand what to expect before they start working with a large company.
How B2B Companies Can Prevent Overdue Payments
Thankfully, you don’t have to sit idly on the sidelines hoping (and praying) that your customers pay you. There are some things you can do to increase your chances of getting paid on time, every time.
Create an Invoice with the Right Details
When creating your invoices, you need to make sure you include all the right information. Most invoices should:
- Be clearly labelled as an invoice and include a unique invoice number
- Have your company name and registered address
- Include your customers’ name and registered address
- Provide a breakdown of the goods/services including individual prices and delivery date
- Display the outstanding balance
- State the payment terms
- Provide details on how to pay the invoice
Follow-Up Outstanding Invoices
Once a payment deadline has passed, it’s important to follow-up immediately. Most companies are hesitant to follow up as they worry about damaging client relationships, but following up on late payments shows that you take your business seriously and expect to get paid.
Invoices can easily fall through the cracks or get forgotten about under the stream of daily emails. So, following up reminds your clients about your invoice and makes sure it doesn’t fall through the cracks.
Start by sending a polite email to ask about the outstanding invoice and when you can expect to receive the payment. If you don’t receive a reply, try calling to confirm the payment plan.
You may need to remind clients several times before finally getting paid. Throughout this process, make sure to keep a detailed record of all communication as you might need to provide this information if you need to seek legal action.
Charging Late Fees on Invoices
Giving clients an incentive to pay by the deadline like avoiding penalties fees can be a great way to encourage timely payments.
Under UK laws, companies have the right to charge interest for late payment. You can typically charge 8 to 15% on outstanding invoices, but you need to make this clear in your payment terms and state the fees on your original invoices.
While charging late fees on invoices can certainly help you get paid on time, most small businesses (79%) choose not to charge a late fee.
Invoice Financing Options for Small Businesses
When clients have lengthy payment terms, it can cause cash flow difficulties and companies need to source alternative financing methods quickly.
Research shows that large companies take an average of six months to pay their invoices and poor payment terms, generous credit expectations and long waits can easily put SMEs out of business.
If you’re dealing with poor payment terms, you could:
- Pay for overheads with a credit card.
- Go into your overdraft.
- Use traditional whole book invoice factoring.
- Take out a business loan from your bank.
- Arrange lines of credit.
- Set up supply chain financing.
Invoice financing can ease the burden faced by many small and medium businesses by getting rid of payment terms early. Learn more about traditional financing options in our recent ebook.
Single Invoice Factoring
Single invoice factoring provides an easy way to cover essential overheads and cash flow gaps when waiting on incoming payments.
With single invoice factoring, you receive an advanced payment on unpaid invoices, so you have the money in your pocket while you chase up outstanding invoices and settle the debt.
Even better, you have complete flexibility as you can secure financing against specific invoices rather than putting up your whole book. An ideal solution for consistently late payers or accounts with lengthy payment terms.
Beat the Late Payment Culture with Lendflo
Research shows that timely payments could help keep over 50,000 businesses afloat and add a further £2.5 billion to the UK economy.
While it’ll take time to solve the overarching problems behind late payments, we can make sure companies have the funds they need to keep their doors open.
That’s why we’ve made it our mission to provide quick financing to companies struggling with cash flow. Companies can cover outstanding invoices to make sure poor payment terms don’t impact their ability to pay staff, follow exciting opportunities for growth and continue contributing to the UK economy.
Check out Lendflo today.