Timesheet Financing: Bridging Business Cash Flow Gaps Resulting From Late Payments

eCapital UK

Last Modified : Dec 11, 2024

The UK business community has a long-standing culture of late payments, where businesses, particularly small and medium-sized enterprises (SMEs), often struggle to receive timely payments for goods or services rendered. This issue has been prevalent for decades and continues to impact businesses of all sizes, though it affects smaller businesses the most. To survive and prosper, SMEs must utilise effective financial strategies to bridge the gap between when services are rendered, and payments received. Timesheet financing is a funding strategy to quickly convert timesheets into immediate cash in hand.

Businesses in sectors like recruitment, staffing, consulting, or any company that provides hourly or contracted-based services can consider using timesheet financing to enhance cash flow. When employees, freelancers, or contractors submit their timesheets to their employer, these businesses can use the documents as proof of work completed to request financing. Providers of timesheet financing are often tech-enabled independent funders, able to verify documents, approve financing, and transfer funds within 24 hours to the business. This provides quick access to working capital to cover operational costs, payroll, and other expenses while waiting for clients to pay invoices.

This article explores the challenges associated with late payments and how timesheet financing can be used as an effective strategy to stabilise financial structures by bridging the cash flow gaps SMEs typically suffer as a result.

The Challenges Associated With a Culture of Late Payments

The persistence of late payments highlights a systemic issue within the UK business environment, where smaller businesses endure the most of delays, affecting their financial stability and growth. Government intervention has made efforts to alleviate late payment issues but with minimal effect.

Here are some key Government initiatives implemented to address the issue of late payments:

• Prompt Payment Code (PPC)
• Small Business, Enterprise, and Employment Bill (2015)
• Small Business Commissioner (SBC)
• Late Payment of Commercial Debts (Interest) Act 1998

Despite these interventions, late payments remain a significant issue:

• According to the Smart Data Foundry, on average, late payments cost SMEs £22,000 a year.
• Over 55% of SMEs reported that late payments increased throughout 2023.
• 31% of businesses spend between 21-30 hours per month chasing customer payments.

While government actions have raised awareness and encouraged some businesses to adopt better practices, the problem persists due to several factors:

• Limited enforcement: Many of the measures are voluntary or advisory, and businesses are often reluctant to act against larger clients for fear of damaging relationships.
• Widespread cultural issues: Late payment has become ingrained in business culture, especially among large corporations, making it difficult to change established behaviors.
• Lack of immediate consequences: Even when businesses report late payments or fail to comply with payment codes, penalties are often insufficient or not rigorously enforced.

The Government continues to attempt effective intervention policies with a new package of measures to tackle the late payment dilemma. However, the challenges are prevalent, current, and potentially devastating – according to FSB research, late payments lead to 50,000 business closures a year. As the problem persists, SMEs must be proactive and implement proven, effective strategies to overcome the financial stress of delayed payments. To combat the resulting financial distress effectively, SMEs need a viable financial strategy to maintain positive cash flow.

Timesheet financing – overcoming the distress of late payments.

Timesheet finance, also known as payroll financing or contractor funding, can be considered as securing finance on timesheets in a similar way invoice financing secures funding on invoices. It allows businesses to unlock immediate cash flow by using the value of their outstanding invoices or timesheets as collateral for financing. Timesheet finance helps companies bridge the gap between when services are rendered and when payments are received, improving cash flow, and supporting growth.

How Timesheet Financing Works:

• Step 1: The business submits the completed timesheets for work completed.
• Step 2: A financing company advances a percentage of the timesheet value, raises the invoice for the amount due on the timesheet to be sent to the customer (client) and holds the balance owing as a reserve.
• Step 3: The business receives the advance, which can be used to pay staff, cover operational costs, or used in any manner to serve the company best.
• Step 4: Once the business’s customer (client) pays the invoice in full to the financing company, the reserve amount is released to the business minus the financing fee charged by the financing company.

Business advantages of using Timesheet Financing

Timesheet financing offers numerous advantages for businesses with hourly, temporary, or contract-based work. Here are some of the key benefits:

1. Improved Cash Flow: Timesheet financing expedites liquidity to help businesses create regular and predictable cash flow.
2. Timely Payment to Employees: Businesses use timesheet financing to ensure contractors are paid on time, improving employee satisfaction and retention.
3. No Additional Debt: Timesheet financing is based on selling assets (timesheets) at a discount in exchange for immediate cash. This strategy delivers cash in hand without incurring debt.
4. Scalability: Timesheet financing is flexible and can grow with the business. As the volume of business or the number of contractors increases, companies can secure more financing, allowing them to scale operations without worrying about cash flow issues.
5. Faster Access to Funds: Timesheet financing provides quick access to funds to pay financial obligations, prevent disruptions in operations, or invest in growth opportunities
6. Reduced Administrative Burden: Timesheet financing providers manage invoicing and collections, reducing administrative burden and allowing the business to focus on its core operations instead of managing accounts receivable.
7. Flexibility in Managing Projects: Timesheet financing helps businesses manage multiple projects simultaneously without worrying about cash flow.
8. Minimal Risk of Bad Debt: Lenders’ professional collection teams are trained and skilled in accounts receivable management, reducing the potential for bad debt. Additionally, timesheet and invoice financing can be augmented with bad debt protection.

Partner with a leading and reputable independent lender to enhance advantages, access the most credit, and leverage maximum flexibility from timesheet and invoice financing. The best of these lenders can tailor a customized financing facility with terms aligned with your company’s cash flow cycle and business needs.

Conclusion

Timesheet financing is a viable solution for small and medium-sized enterprises (SMEs) struggling with the prevalent issue of late payments that significantly impact their cash flow and financial stability. By allowing businesses to use timesheets and invoices as collateral, timesheet financing provides quick access to working capital, ensuring timely payment to employees, covering operational costs, and supporting growth. This strategy helps SMEs bridge the gap between when services are rendered and when payments are received without incurring additional debt. With benefits such as improved cash flow, scalability, reduced administrative burden, and faster access to funds, timesheet financing can offer SMEs a flexible and effective way to manage their financial challenges while minimising the risk of bad debt. Despite government interventions to address late payments, SMEs must proactively adopt such solutions to mitigate the financial strain caused by delayed payments.

Contact us today to learn more about flexible business financing solutions to navigate cash flow issues and how we can maximise your company’s access to working capital.

Key Takeaways

• The persistence of late payments highlights a systemic issue within the UK business environment, where smaller businesses endure the most delays, affecting their financial stability and growth.
• To survive and prosper, SMEs must utilise effective financial strategies to bridge the gap between when services are rendered, and payments received.
• Timesheet financing is a financing strategy to quickly convert timesheets into immediate cash in hand.
• With benefits such as improved cash flow, scalability, reduced administrative burden, and faster access to funds, timesheet financing offers SMEs a flexible and effective way to manage their financial challenges while minimising the risk of bad debt.

eCapital UK

eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.