Education

With 400,000 small businesses struggling to get paid on time, what are your options?

16 Feb 2022

Many SMEs wait months for their invoices to get paid, and a knock-on effect can occur. You mightn’t have the cash on hand to pay your suppliers if you get paid late, and this ripple effect can put many businesses in danger and potentially affect their reputation and credit standing. You don’t have to avoid this overdue payment problem; you can challenge it head-on because two principal approaches exist to tackle the issue. You can negotiate with debtors and creditors or use specific finance options to alleviate cash flow issues. In this blog article, we’ll discuss both options in detail.

Calculator next to bills

The current situation on slow payments for SMEs

Despite the introduction of UK government legislation to speed up the process of late payments for small businesses, according to a recent (January 2022) Federation of Small Businesses report, more than 440,000 small firms might be forced out of business in 2022 by the late payment crisis. The Federation has called for urgent government intervention to improve the way firms get paid.

A third of small businesses surveyed told the FSB that past due payment of invoices has increased over recent months, with at least 8% warning the problem was so bad it threatened their business’s viability.

Overdue payments have been a long-term issue for SMEs who pay their suppliers, wages and other bills on time but face increasingly long waits to get their invoices paid on time.

The FSB said over 400,000 small firms ceased trading since the pandemic and a similar number are in peril by late payment issues alone.

The FSB has said every big business and government organisation should abide by the prompt payment code, and 30-day payment terms should be “the norm for those committed to environmental, social and governance best practice”.

The FSB wants every UK corporation to appoint a non-executive director to its board with direct responsibility for payment culture. The organisation promotes the Fair Pay Fair Play campaign highlighting the overdue payment epidemic that plagues small businesses in the UK.

The Government has been proactive to tackle the worst kinds of poor payment behaviour, tightening up the Prompt Payment Code to get big companies to pay small partners on time.

Protect your credit rating

You must avoid falling behind with payments to suppliers, service providers or creditors. Late payments might get recorded on your credit file, and you could incur penalties for overdue payments. It’s therefore in your interest to have a strict credit control policy in place.

Invest in payment technology

It doesn’t matter if you’re a one-person business or a large SME; you can use many of the excellent accounting software packages on the market to chase payments on your behalf automatically.

There are many packages to choose from, and they represent outstanding value. The software acts as your virtual bookkeeper, and specific features allow you to diarise payment reminders for your customers.

Late payment reminder letter

You can compose payment reminder letters with personal content. For instance, you could explain that you’re a new or small business. You’re delighted to have your customer’s business, and cash flow is the lifeblood of your business. So, you’d appreciate a quick payment to ensure a continuous supply.

This personalised approach might work better than an aggressive invoice or mail with bold red words and a harsh tone.

Late payment penalty clauses

Getting the terms payment clear at the start of a new relationship can work in your favour. You have the right to charge fees for late payments, and the costs can add up to quite a severe penalty.

Put yourself in the customer’s position; will they suffer, for example, an extra 5% on their original invoice cost of £1000 because they delayed payment?

But it’s crucial to get this clause procedure in place from day one. You can’t simply add the late charge on an ad hoc basis as it’s likely to upset your relationships with customers.

Negotiate with debtors and creditors

Don’t forget people, not necessarily machines, do business with each other. So why not build up a personal relationship with the credit controllers in the firms (debtors) that owe you money?

Similarly, if you’re experiencing a cash flow issue because of late payments and can’t pay a supplier, don’t ignore the problem. Why not call their credit control department (your creditors) and explain the situation? You might get a deferral or arrange a short payment instalment plan.

Consider financial options to smooth out the issue

Once you have developed a coherent and consistent credit control policy and opened dialogue with creditors and debtors, you might want to concentrate on other ways to alleviate the budgetary impact and the stress of overdue payments.

Perhaps the most obvious solution is to have an overdraft on favourable terms. Used in conjunction with the credit-control policy mentioned earlier, you’ll be in complete control.

Overdraft

Consider this, if your overdraft costs 5% per month, and you’re levying a minimum of 5% on invoices more than 30 days old, you might be close to breaking even with late payers.

Putting such an overall control strategy in place can help you concentrate on what makes your business tick rather than get dragged down and side-tracked by negative issues. 

There are overdraft alternatives covered here, and some might be more relevant to your business than a straightforward overdraft.

Cash flow finance

The term ‘cash flow’ means the cash and cash equivalents that flow in and out of your company, and you can read a detailed overview about cash flow funding here. There are several ways cash can enter your business, through customers buying products and services or the accounts receivable.

Cash can leave your business in expenses and accounts payable. If you’re looking to create value, your business should aim for positive cash flow.

Businesses usually work out their cash flow monthly, then roll that figure over each month to track the business’s financial health.

You can apply for tailor-made cash flow funding as unique as your business, beginning the process here.

Find funding

Invoice finance

There are other funding options also available. There are two types of invoice financing available, invoice factoring and invoice discounting. Whether you want to control the cash flow for your business, or the lender takes care of it for you, both products are potentially excellent solutions.

Invoice factoring is highly popular, a process whereby a lender buys your debt off you at a discount. You get paid very quickly, and the factoring firm takes the risk of collecting the debt. You can learn more about invoice factoring here.

If you think either funding option might be right for you, you can begin to investigate your options by clicking here.

Apply for funding

Stock loan

There’s another possibility for you to help alleviate any potential cash flow problems as a debtor depending on the industry. You could organise a stock loan to fund your stock, ensuring that you keep excellent relationships with your suppliers. The stock loan is simply another form of a business loan.

You’re then left with only one side of the business equation to consider, your paying customers. In effect, the stock loan can run separately from your other funding, and business finance specialists can help you arrange such a stock loan as individual as your business.

In conclusion, a combination of payment software, a strict credit control process, highly personable skills and various finance options can significantly limit the impact past due payments can have on your business.

If you need help to put together an application for any of the finance options mentioned previously, clicking the button below and filling in a brief contact form will begin a dialogue with Funding Options’ dedicated business finance specialists.

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Editorial Team

Editorial Team

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