The Impact of Late Payments on SMEs - Challenges and Solutions
Content
Following the UK election on July 4th, several favorable factors are converging to bolster the nation’s economy. A stable government, anticipated interest rate decreases, and stabilising inflation will likely help stimulate growth. However, a continuing downward trend is threatening the financial health of SMEs as over two million of Britain’s small businesses fall victim to late payments. The Federation of Small Businesses (FSB) reports that the proportion of small firms whose late payments worsened in the final quarter of 2023 rose from over one in four to over a third.
Accessing funds quickly and efficiently to cover immediate financial needs is essential for companies to sustain operations, navigate the challenges of operating under economic pressure, and prepare for growth. As late payments interrupt cash flow and impairs financial health, SMEs need to take preventive measures to mitigate the impact of past due payments. Independent funders champion this cause with fast, easy-to-acquire business financing options to increase liquidity and regulate cash flow as traditional lenders exit middle-market lending.
This article discusses the challenges of late payments and how SMEs must leverage accounts receivable (AR) management efficiencies to maintain financial stability. Keep reading to learn how leading independent funders help SMEs create more stable yet flexible financial structures to overcome the challenges of past due payments and interrupted cash flow.
The problem
Late payments have become an expected business condition as SMEs report that 36% of their monthly receivables are past due payments. Government intervention attempts to ease this situation through initiatives such as the Reporting on Payment Practices & Performance Regulations, first introduced in 2017. The regulation, requiring large businesses to report information on their payment practices and performance, is supported by a watchlist that lists companies with the worst payment performance figures. This increased transparency aims to prompt large businesses to improve late payment practices and empower SMEs with better information for contract negotiations and collection efficiencies. However, the problem of past due payment is not going away – SMEs have seen a 55% increase in late payments over the past six months.
Late payments create cash flow problems, hinder financial stability, and disrupt operational continuity. Additionally, businesses may incur increased costs, such as late payment fees to suppliers or expenses associated with hiring collection agencies to recover missed payments. Moreover, consistent late payments can result in strained relationships with suppliers, diminished ability to pursue future business prospects, and demoralisation of the company’s workforce if payroll issues arise. Late payments can potentially force companies to exit the market if left unchecked.
Reducing the impact of late payments
SMEs can reduce the impact of late payments by regularly reviewing and monitoring accounts receivable to identify overdue payments early and take proactive steps to follow up. Effective work practices to increase AR management include the following:
- Set up electronic payment methods: Digitize payment processes to eliminate manual errors, improve efficiency, and ensure faster transactions.
- Offer discounted invoices: Encourage prompt payments by providing discounts for early settlement, enhancing cash flow and customer incentives.
- Use invoice automation software: Implement cloud-based systems to streamline invoicing, reduce processing time, and enhance accuracy in payment management.
Although the above-listed tactics are recommended work practices to improve AR efficiencies, more is needed to stem the tide of late payments, which has become a national issue. A solution-focused approach to regulate cash flow and stabilize financial structures is necessary for SMEs to survive and prosper.
Taking a solution-focused approach to late payments
Successful business leaders effectively manage and prioritize liquidity in the face of disrupted cash flow. The objectives of liquidity management are to ensure that the business has cash on hand to fulfill its financial obligations and weather the storm during anticipated and unexpected events.
Taking a solution-focused approach to achieving financial stability, these leaders often collaborate with leading independent funders to develop alternative solutions that ensure reliable access to working capital. Leveraging their sales ledger to enhance liquidity has been a successful strategy for many SMEs, allowing them to outpace competitors that were not as well capitalized.
Invoice finance
Invoice finance is an easy-to-acquire funding option that converts the outstanding invoices on a company’s sales ledger into immediate cash. This flexible funding option improves cash flow and saves time with professional credit management services to manage collections for you.
Here’s how invoice finance works:
- Funding request: When your company invoices a customer, upload a copy of the invoice into the funder’s online system.
- Receive your funding: the funder will provide up to 90% of the invoice value within 24 hours.
- Credit management services: The funder’s professional accounts receivable team will courteously manage collections, protecting customer relationships and leaving your staff free to focus on running the business.
- Receiving the balance due: When your customer pays, the funder deducts their fee and sends the remaining funds to you, completing the transaction.
There are several advantages to invoice factoring, especially when compared to bank loans:
- No debt or compound interest: Invoice factoring involves selling invoices for immediate cash without incurring debt, interest, or restrictive covenants.
- Quick approval process: Financing approval is typically decided within days, based on the company customers’ creditworthiness rather than the business’s credit score.
- Fast funding: Funds are available within hours of invoice submission, avoiding lengthy processing times and mitigating the impact of late payments.
- Flexible funding: No strict upper limit on funding amount. Credit limits can increase to keep pace with growth trajectories.
Conclusion
Despite improving economic conditions and the election of a more stable government, SMEs continue to face a concerning problem. Late payments have been a national concern since well before the pandemic, affecting 36% of monthly invoices for SMEs, and the rate is increasing! Late payments cause significant challenges, including cash flow problems, financial instability, and disruptions to operational continuity.
Conventional work practices are recommended to mitigate late payments, but much more is needed. Invoice finance emerges as a key solution, offering quick funding without debt or complex approval processes. It leverages customer credit to help fill cash flow gaps and overcome the effects of late payments.
Reliable cash flow enhances business resilience and competitiveness. Invoice finance immediately converts accounts receivable into cash in hand, providing stability to meet financial obligations, invest in growth opportunities, and adapt swiftly to market challenges.
Contact us today to request a free financing consultation and see what we can do for your business.
Key Takeaways
- Late payments have become an expected business condition as SMEs report 36% of their monthly payments are overdue.
- The ability to access funds quickly and efficiently to cover immediate financial needs is essential for SMEs to maintain stability.
- Successful business leaders proactively manage and prioritize liquidity in the face of disrupted cash flow.
- Invoice finance is an easy-to-acquire funding option that converts outstanding invoices into immediate cash to improve cash flow and financial stability.
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.
