The impact of late payments can be drastic on small businesses. Late payments are detrimental because they disrupt financial stability, incur additional costs, hinder growth potential, strain relationships and can have a lasting impact.
But how do we avoid late payments?
And, if we can’t avoid them, how do we mitigate the impacts?
Alex Von Schirmeister, Managing Director of Xero UK and EMEA took to the stage at this year’s Elite Business Live event along with an insightful panel including Andrea Reynolds, Founder & CEO of Swoop, Emmanuel Asuquo, financial advisor and TV personality, Liz Barclay, Small Business Commissioner and Richard Bearman, Managing Director of the British Business Bank. The panel spoke about the challenges of late payments, and the impacts it can have on the productivity and financial stability of a business.
Liz Barclay discussed how late payments affect not only the productivity of small businesses but also business owners’ mental health. Late payments can take a business owner’s time and attention away from day-to-day operations, hence, lose focus of other tasks at hand. “If you’re spending three and a half hours a week chasing unpaid invoices, you don’t know if you can recruit, if you can invest, and whether you can grow the business, so your productivity is down,” Liz said. “You’re worrying about whether you’re going to have the money to pay the wages, and that keeps you awake at night. Throughout my career, I’ve been either a freelancer or ran my own business. And so, I know what that feels like. If you are awake worrying, that affects your mental health. So, it’s not just the economy we’re talking about here. This is lives we’re talking about and it’s the lives of small business owners.” Late payments affect the trajectory and forward planning. If you do not know when the cash is coming in, it gets difficult to allocate finances into different areas of your business. “Late payments make a huge difference,” she added. “If you know when the payments are going to hit the bank account, you can do an awful lot more with your business. The government wants growth, they want to increase productivity. This is the place to start.”
Emmanuel highlighted the importance of open conversations between self-employed individuals and their clients regarding payment expectations and consequences. He spoke about the uncertainties self-employed individuals face, and how late payments can affect their mental health and family planning. Late payments can put extra pressure on other parts of your business, leaving you unable to pay staff wages, for example. “Once you become self-employed, you can’t guarantee that you’re going to get paid once a month,” Emmanuel explained. “I speak to business owners who maybe have a good year, but because the money has taken so long to come in due to late payments, they don’t get to experience the money that they’re making. When you become self-employed, mortgage planning can be very difficult. There is even more pressure when you’re not only paying yourself but paying other staff. You must put them before yourself and if they don’t get paid on time you can lose good talent.”
Alex highlighted how technology and digitalisation can help small businesses with invoicing and payment processes, while emphasising the need for a culture shift towards timely payments. “There’s no question that technology will do several things to mitigate late payments,” he told the audience. “Technology can help you be on top of your numbers and adding visibility is critical. Technology can also help make your invoicing process more efficient so that you know when the money is coming in. I think the challenge here is the culture around late payments, of not caring about paying on time. There is a culture of larger companies either not realising this is a problem, or worse, not caring about the consequences of late payments. There’s a complete lack of awareness and intimacy of the impacts late payments have on SMEs. But also let’s be honest, we should call it unapproved debt. Many larger companies are purposeful living and then economically drawing a benefit from paying late and that should be unacceptable.”
Andrea Reynolds spoke about the challenges she faced with late payments from suppliers and the awkwardness of constantly chasing late payments, especially if you’re trying to build and maintain relationships. Sending automatic payment reminder emails or using a third person as a reason you’re chasing up for a payment, could be ways to get the payment process sped up – while still maintaining a good relationship with your suppliers. Using technology, such as automated accounting software, can also be a fool-proof way to automate the payment processes while taking your mind off the tedious task of chasing up on your customers. “You’re trying to put your best face forward when you’re dealing with customers to show you’re a strong financially viable business, and then chasing invoices might come across the wrong way,” Andrea said. “Setting up automated reminders in your accounting software, for example, can take a little bit of the psychological edge away from you personally chasing this business.”
“From my experience, the larger businesses are the hardest to get to pay on time,” Andrea added. “But I think there’s more work and more pressure we need to be putting on those organisations because they come up with excuses and say it is due to their system or procurement policy. I think there’s a lot of improvement to be done there. To anyone afraid of that first step of chasing invoices, use technology so there are no excuses. There’s no excuse if you’re receiving an automated reminder. And it’s not you as a business owner personally chasing. The other trick that we all use is the good cop, the bad cop – having the scary finance person ‘chasing’ the supplier for the payment. You can continue that relationship with the supplier and claim your finance team is chasing you on the payment. I think those types of tips genuinely work.”
Richard Bearman talked about the culture of late payments and encouraged SMEs to use financial products to maintain cash flow when facing late payments. “We see many businesses coming to us for help because they’ve just got this cash flow issue of late payments. There’s a culture issue with this, and a lot of the businesses facing the impacts of late payments are small to medium-sized businesses. I can remember a very specific example of an entrepreneur who was saying he was just getting evermore frustrated about late payments. And then he realised that the projects he supplied were crucial to the customer. From then on, he said he would not deliver until he had been paid. Even though that’s an extreme example, I think that’s what the testing of power is. And then the other end of the spectrum using the financial services products, there are digital products that can minimise the impact of late payments and protect your business.”
Richard also suggested using asset-based finance to keep trading despite late payments, with opportunity cost as a consideration. “If you’ve got good credit, think about the finances and opportunity cost, and then raise money against those assets, lease the money and keep trading,” Richard said. “It doesn’t stop the late payments but at least it is paid and allows you to keep trading, and yes of course it comes at a cost but consider whether it’s an opportunity cost.”
