A new report from Siemens Financial Services has found that the combination of unpaid invoices, cost of pursuing late payments and long payment terms means that SME’s are missing out on over £250 billion of liquid cash flow each and every year.
Why Do SME’s Struggle With Late Payments?
Compared to larger companies, SME’s tend to suffer much higher rates of late or defaulted payments from their customers, particularly towards the end of the supply chain. BACS Payment Schemes has also released some interesting data around this, mainly stating that SME’s are currently owed a total of £14 billion by their customers – which while it is an improvement from the £30.3 billion figure of 5 years ago, is still causing huge performance problems. Without that liquid cash balance in the bank, SME’s will struggle to pay their own suppliers, be unable to recruit new employees or grow and ultimately remain stunted. This also means that SME’s are increasingly relying on external funding to stay above water – with over a quarter utilising bank overdrafts and loans just to keep up with their cash overheads while they await late payments.
There are a few different reasons this late payment epidemic could be continuing to happen. Some argue that it is a cultural problem, with the combination of standardising credit agreements for customers and business using outdated accounting models (which slow down invoicing and collections) creating an environment where it is considered acceptable to delay payments. In order to combat this culture, SME’s need to start changing the way they deal with customers and operate financially. Others suggest that SME’s undervalue the amount of working capital they will need, or that suppliers simply don’t value SME’s as much as their bigger clients. Whatever the reason, the problem of late payments for SME’s isn’t going away any time soon, so the pressure is now on the business owners to find ways around it.
How Can SME’s Combat Late Payments?
Of course, it is impossible to control other people’s actions, which leaves us with changing our own to protect our businesses against the problem. So how can a SME owner take steps within their business to combat late payments? Well, there are a few options, including:
- Ensure Your Payment Terms Are Clear – For many SME’s, suppliers or clients fail to pay on time because there is something within your terms or processes that isn’t clear – especially if the person paying the invoice isn’t your direct contact. So ensuring that all payment information is included on your invoices, that services are labelled clearly and your payment terms are available elsewhere can solve quite a few problems.
- Employ A Debt Recovery Specialist – A big issue within SME’s is that they feel unable or unequipped to go out and recover debts owed to them. A staggering 40% of SME’s have reported that if the payment is late enough, they will simply strike it off as a bad debt instead of pursuing it. But instead of spending your own time on recovering the debt, you can hire a debt recovery specialist to take this on for you. This means you will be able to maintain a positive relationship with your clients and spend time on areas of the business where you can make a positive difference.
- Carry Out Credit Checks – If you are dealing with large amounts of credit or very valuable transactions, we strongly recommend you consider carrying out a basic credit check before engaging with the client. This is simply to assess their likelihood of paying your invoice in time. So before you engage, make sure you know exactly who you are engaging with and check they aren’t hiding any skeletons in the closet.
At Debtcol, we specialise in helping businesses of any size recover debts owed to them by suppliers and customers. In fact, the eagle eyed among you may have noticed that we were one of the sources of data for the Siemens Financial Services report (footnote 31), thanks to our extensive work in debt recovery for SME’s. We have spent years working with SME’s to help them maintain a healthy cash flow and encourage growth through one off or multiple, ongoing debt recovery services. We understand the financial impact unpaid invoices can have on both your business and your own motivation, which is why we strive to provide an easy to use outsourced service that really delivers.
For more information, or to enquire about your debt recovery needs today, just get in touch with the team for a free consultation.