Every business whether it be large or small is effected by late payments and with many businesses being part of a supply chain and transactions being interconnected, once a supplier is not paid, they are unable to pay customers. This cycle will affect more than one business.
Unfortunately late payments are a fact of life. However, many people tend to focus on the cash not coming in on time and how it effects their bank balance, whilst discarding operational and social pressures that are also the results of late payments that equally effect the success and effectiveness of small businesses.
Let’s take employment and recruitment for example; A small to medium-sized enterprise (SME) must have the right amount of staff to run the business effectively the increased base cost from ever increasing minimum wages and additional pension contributions on top, the margin that the SME has to play with when cash flow is tight because of late payments becomes a concern.
With unknown payment dates and late payments it’s not surprising that many SME’s can end up with a lack of staff effecting the operational aspects of the entire business as it tries to do more with less.
As well as the operational side suffering, chasing payment or being chased can also damage commercial relationships. Although more companies are trying to reduce the amount of vendors they work with to make the process more streamlined and ensure quality constancy and benefit from economies of scale, the relationship aspect becomes more and more to the forefront. But what happens when payments are still late, and you have increased your commitment and exposure to your own suppliers?
This may be a potential loss for all, including the economy. If numerous SMB’s go in to liquidation, there will be a loss of jobs across the supply chain, with buyers at the top also suffering as they need to restore their supply base. This in turn increases the cost of the end product that the consumers buy and we have to share the part of the load.
If the owner or financial controller doesn’t know when the payment will be made this also may lead to them missing out on contracts or new opportunities, as well as running the risk of late payment fines to their suppliers.
As we can see a late payment has a direct effect on an SME, so what does the SME do in order to try to combat the effects of late payments on their financial supply chain?
If an SME does not have enough free cash on the balance sheet to cover their own commitments, a suggestion would be to call the bank for a credit facility in the shape of either an overdraft or loan. Either option can be expensive and take several days to arrange due to stringent credit checks and paperwork.
An alternative is invoice factoring which released part of the value of an outstanding invoice; however, this can be expensive. On average you will only receive a percentage of the invoice value (50 -70%) and on top of this you will be pay an interest percent on the base rate, plus legal fees, set up fees and annual contract fees.
The last option includes working collaboratively with your supply chain partners by opting into a business network platform with your buyers. By doing this you are able to send your invoices directly to your buyers. Just by this action of automated increased visibility, your buyer is able to offer you several options for you to work better together.
Your buyer can propose a Dynamic Discounting opportunity where for a very small reduction, say 1 or 2% you can be paid instantly. Or alternatively there is an chance for all your invoices to be paid on approval by default, again for a very small percentage administration fee via a third party processor like MasterCard. And finally, should you not wish to benefit from a buyer lead incentive, then there is always the opportunity to directly finance a 100% of your invoice through a company like Clear Funding. This new solution provides turnkey funding without contracts and administration fees, and is tied directly to the business network, so the ability to finance individual invoices as cash flow requires can be done in just a couple of clicks.