How to Manage Late Payments as a Small Business

How to Manage Late Payments as a Small Business

According to the Small Business Commissioner’s website, a third of payments to small businesses are late with the average value of each payment standing at £6,142. As late payments become increasingly common in the UK, SMEs face cash flow problems, staffing issues and even closure.

As a small or medium business, it’s vital to invest any profits back into the business to fuel further growth. But, this isn’t always possible if invoices are unpaid or late. However, you can take actions to better manage late payments and avoid the stress of chasing late invoices.

In this article, we’ll explore how late payments affect SMEs and what you can do to tackle the problem head on.


Why are Payments Late?

SMEs account for 90% of all business in the UK. However, they suffer from late payments disproportionately when compared to larger companies.

Siemens found that SMEs wait 72 days on average for payment, which is a staggering 50% longer than larger businesses. There are several reasons contributing to this toxic payment culture, including:

- Larger companies demand 90-day payment terms from smaller suppliers.

- Smaller businesses don’t have the resources to challenge larger companies.

- Smaller businesses fear commercial repercussions, so they don’t have the bargaining power needed to negotiate stricter terms.

Political and environmental factors also cause delays within the supply chain, leading to overdue payments and a strained commercial environment. For example, 50% of SMEs experienced problems getting their invoices paid during the COVID-19 pandemic. This unprecedented global event throttled the supply chain and put SMEs under even more pressure than usual.

It’s important to note that while smaller businesses bear the brunt of late payments, they have the same rights as large multinationals when it comes to getting paid on time.

Under UK law, payments for goods and services provided to the public sector must be made within 30 days, and all payments for goods and services provided to the commercial sector must be made within 60 days. Despite this, small businesses face the harsh reality of chasing up invoices, putting their company on the line when they run into cash flow problems.

(As a business owner, dealing with late payments can have a negative impact not just on your business, but on your mental health.)


The Effects of Late Payments on Small Businesses

Late payments can have a ripple effect on SMEs, affecting financial performance at first before seeping into the personal lives of business owners.

Cash flow problems

Unlike large companies, SMEs are unable to absorb the costs of late payments, which has a direct impact on cash flow.

According to the Federation of Small Businesses, 37% of FSB members have run into cash flow difficulties with 20% citing a slowdown in profit growth due to late payments.

To help overcome these cash flow problems, SMEs have to make difficult decisions, which could involve using their business finance. Instead of putting much-needed profit back into their business, SME owners are forced to sustain themselves with this money, which creates a huge barrier for growth.

With unsteady cash flow, paying employees’ salaries could prove difficult — particularly in times of crisis when cash is already tight. As cash flow is the lifeblood of your business, staff are the oxygen. Without payment, the team risks becoming demotivated and disinterested, which can lead to untimely resignations only further increasing pressure on owners.

This situation also further perpetuates the late payment cycle as unpaid invoices and rocky cash flow situations could force SMEs to delay payment to suppliers, jeopardising business relationships and causing a knock-on effect down the supply chain.

Time lost to administrative work

According to a study carried out in 2017, 5% to 10% of all administrative work involves chasing payments. Chasing payments burdens SMEs even more by taking up precious time that could be used for more productive, higher value tasks.

The average UK SME chases up on five outstanding invoices at any one time, carving out 1.5 hours of their day. Spending 7.5 hours a week is unsustainable for business growth and unprofitable admin tasks like this can often seep into SME owners’ personal time — which can be detrimental for their mental and financial health.

Increased stress

While cash flow problems are a significant hurdle to overcome, late payments can also have a negative impact on small business owners’ personal life. Due to the effects of late payments, owners often experience stress, insomnia and depression.

Recent research by Pay.UK revealed that more than a quarter of SME business owners stress about late payments even when they’re not at work, while almost one in ten business owners has considered seeking professional support to help with anxieties over being paid late.

With the prevalence of late payment culture in the UK, it’s no wonder that over 50,000 small businesses go bust every year, buckling under the financial pressures and personal anxiety of late payments.

(The Small Business Commissioner is a Government body that can help small businesses handle late payments.)


What is the Small Business Commissioner?

The Small Business Commissioner (SBC) is an independent public body set up by the Government in 2017 to tackle late payments and unfavourable payment practices in the private sector. Covering the whole of the UK, the SBC empowers small businesses to resolve late payment disputes.

By tackling the hostile business culture of late payments, the SBC aims to create an equal environment for businesses of all sizes. As a free-to-use and impartial body, the SBC’s an ideal resource for any small business dealing with unpaid invoices.


How can the Small Business Commissioner Help you?

The Small Business Commissioner can help you ensure your business is equipped to handle late payments. For example, the SBC:

- Provides free advice and guidance on how to resolve general disputes with larger businesses.

- Refers small businesses to organisations that can offer advice, assistance and support in resolving disputes through the website.

- Consider complaints regarding payment issues between small businesses and large customers and will recommend how to resolve these disputes effectively.

On the website, there are two avenues to help you handle the late payment issue: advice on how to deal with an unpaid invoice and a complaint service. There are certain criteria that you need to consider before choosing either path, so ensure you fit the requirements before going forward.


Other Tips for Managing Late Payments

Here are some other practical tips you can use to help manage late payments in the future:

- Adopt invoicing technology: Using an automatic invoicing tool can cut down on administrative tasks and make invoice organisation easier.

- Establish clear terms: Obtain written acceptance of your payment terms (e.g., payment due within 30 days) and highlight this clearly in your invoices.

- Consider late payment fees: Don’t be afraid to set charges for late payments. Just make sure you're open with the other party about this fee and add the appropriate clause in your contracts.

- Automate invoice reminders: Don’t wait until the due date of the invoice. Instead, set up regular reminders beforehand to prevent missed payments.

(Establish clear payment terms in your contract and invoices to manage expectations.)


How We Can Help You

At 365 Business Finance, we offer a merchant cash advance product to small and medium-sized businesses across the United Kingdom as a direct financial provider.

If you’re constantly battling late payments, a merchant cash advance could give you the freedom you need to grow your business. A merchant cash advance is designed as a quick way for any business that accepts credit or debit cards to raise capital without the need for a bank loan or hefty overdraft.

We offer £5,000 to £200,000 in unsecured cash advances for UK SMEs with no APRs, hidden costs or fixed monthly payments, letting you focus on running your business.

Our merchant cash advance product can help give your business capital so that you’re in a prime position to take your business to new heights.

Apply for a tailored quote today and see how can help your business reach its full potential.

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