In 2018, online research conducted by market research consultancy Opinium with more than 500 UK small and medium-sized enterprise decision-makers found that 61 per cent of invoices issued by UK SMEs remain unpaid within the agreed debtor day period.
The research found that one in six (16 per cent) SME invoices remains unpaid after 90 days and, of these, almost half have still not been settled after six months. Medium-sized businesses with between 50 and 249 employees are the worst affected by delayed payments with a quarter (24 per cent) of invoices remaining unpaid after their debtor day period or not at all.
Three years later, the issue of late payment has not disappeared for small businesses. Last month, the government announced the strengthening of the Prompt Payment Code, encouraging companies to pay their suppliers on time.
The truth is that, while a delayed invoice payment may seem like a minor issue, it can amount to trouble for businesses, particularly SMEs. Having regular late payments will affect cash flow through your operations, leaving such enterprises unable to pay bills and staff.
The cash flow struggles may lead to more significant problems, such as increased debt, bankruptcy and closure.
If you repeatedly find yourself on the receiving end of late invoice repayments, it is essential to act and avoid becoming part of the ’90-day’ club. Waiting for funds from third parties may make you feel helpless, but there are steps you can take to ease the strain on your finances.
We have detailed those steps below.
- Set up a credit management policy
- Review your billing practices
- Utilise invoice finance
- Look at other cash flow management solutions
Set up a credit management policy
If late – or lack of – customer payment is a recurring theme in your business, it may be time to reconsider your credit management policy or set one up if you haven’t already.
A credit management policy dictates the timeframe you want customers to pay you in and how and what you will do if payment is late. Under your policy, you may choose to send out reminders ahead of due dates, schedule calls to customers who are late or even carry out credit checks on new customers to ensure their ability to meet invoices. You will also want to outline what action you will take if payment is persistently avoided, such as late fees, cancelled contracts or even legal action.
Once you have determined your policy, be sure to communicate it with your customers. This may be done in writing ahead of signing a contract or outlined on the invoice you provide. By ensuring they understand the policy, you can manage expectation and leave no room for misinterpretation.
It is vital to stick to your policy once created and obtain staff buy-in. This will ensure fair treatment of all customers and turn the policy into standard protocol, creating a culture where individuals know when to pay you and what will happen if they do not.
If you are aiming to create an efficient credit management policy, our tips will assist you in your mission.
Review your billing practices
As well as effective credit management, it may be necessary to review your billing procedures. If customers cannot pay, whether it is due to technical issues, lack of clarity or other, it will inhibit your invoice systems and could amount to repeated delays.
Make sure customers are clear on how to pay you and review this regularly. It should be straight-forward for your customers, with no barriers ahead of payment. Any reports of problems should also be quickly looked into.
You will want to have an efficient accounting system to assist your billing. This should be digital, allowing you to easily track orders and prevent payments getting lost into the ether. Those using the system should be appropriately trained too.
Similarly, you may also review your invoice system. Many customers prefer digital invoices for ease of access and speed, but it is essential to check that this is best for your customer base. Invoices should also be sent out in a timely fashion, with accurate information and explicit instruction, to prevent delays or pushback from customers.
Utilise invoice finance
To mitigate the impact of late payments, growing numbers of SMEs turn to invoice finance to secure reliable cashflow.
Invoice discounting arrangements are advances made against invoices’ value, typically 80 per cent to 90 per cent of their value. They can be extremely helpful for companies with rapid growth because the security of cashflow will unpin their ability to expand.
The benefits of invoice finance include quick access to funds (within 24 hours) and competitively priced options on the lending market.
The lender will undertake some due diligence, examining your accounts and carrying out a detailed analysis of your sales ledger history and credit control procedures. There is a spin-off benefit because this can help introduce improved credit control disciplines into your business.
This type of borrowing is more appropriate for manufacturers, distributors and service providers than for retail and cash businesses or those allowing returns and refunds.
Invoice discounting leaves the ledger in your control, and you are responsible for collecting payment and for credit control and can be on a disclosed or undisclosed (confidential) basis on your invoices. Factoring is the same as invoice discounting except that the factoring company is responsible for the credit control function, and this is priced in accordingly.
The advent of single invoice discounting or selective invoice discounting means that you can now just use invoice finance selectively on as few as one or two invoices without having to sign a lengthy agreement or pay minimum monthly fees. Although both these requirements are currently being eroded with some providers issuing contracts with one-month notice periods and no minimum fees. This can be very useful when you need help to pay VAT, PAYE or Corporation Tax bills or to fund purchases that you must make to fulfil a large order you have just received.
By utilising invoice finance, you can free up working capital otherwise stuck in unpaid invoices, as well as shorten your waiting times for payment. However, it is essential to ensure your customers are still paying you, as you will need to repay the lender and don’t want this coming out of your own pocket.
Look at other cash flow management solutions
If issues with your invoices are mounting up against a larger cash flow problem, it may be worth considering the different options available to give you a boost.
In today’s lending market, there are several solutions open to businesses. The key is finding the right one for you. These include:
Each possesses unique advantages and disadvantages, so spend time considering the options and which suits your needs best. However, they are all viable ways of injecting capital into your operations, helping you overcome cash blockages while experiencing temporary sales or payment challenges.
Get advice
If you are experiencing cash flow problems in your business, it is critical to act swiftly before the issue worsens. This may mean implementing new credit management procedures, reviewing your billing and accounting systems or utilising invoice finance to lessen the effects of that ’90-day club’.
At Pegasus Funding, we offer advice on a variety of cash flow management solutions. Our advisors can discuss the challenges you face and provide tailored guidance to enable you to overcome them.
We can also share relevant lenders and funding types with you, putting you in contact with the right providers and assisting you in your application.
To find out more, contact us today.