The Impact of Late Payments on Cash Flow
1st August 2023
Submitted by Nina Albert
Around 87% of small and medium enterprises (those with annual sales of less than £5 million per year) are paid late in the UK, and other countries are faring no better. Businesses in the US, for instance, report that they are owed an average of $304,066 by late paying clients. It’s not just the amount of money that is worrisome, it is also the sheer number of invoices that are being paid late—about 50% of all those issues by small businesses in the UK. Most receive payment close to six days after the due date, which seems relatively bearable, but than late-playing customers realize.
Strained Relationships With Clients
Companies themselves have bills to pay, and having to wait on expected income in order to pay them, can lead to strained relationships with clients. Not all customers heed reminder notices in less than a week, and those who in turn are waiting for payments themselves may have no other option than to request the acceptance of late payment or sever their relationship with creditors. Even those who do eventually pay up and make it back into the “good books” may have trouble obtaining goods and services in advance, since their reputation will have been marred by their payment history.
Higher Staff Turnover
Employees who are expected to wait to get paid for projects and those who have to continually chase up non-payers can easily grow tired of the job and seek alternative employment. A HubSpot survey indicated that 69% of employees said they would work harder if they were better appreciated. However, in the UK, only around 8% of employees are engaged, as per a Gallup State of the Global Workplace report. When it comes to motivating and retaining staff, timely payment of salaries and bonuses is a given. No worker wants to stay in a job that is causing them . Financial woes are one of the biggest causes of anxiety and stress. Workers are not likely to remain in a company if they cannot pay their mortgage, look after their children, or enjoy life. In fact, studies have shown that one of the most important qualities graduates are seeking from companies, is a good work-life balance—something that is not possible when salaries are continuously paid late.
The Effect on New Projects
Businesses that are not paid on time may not be able to afford the human resources or materials they need to offer new lines of products or services. In other words, they may have to halt their growth or decline requests and orders, and the long-term effect can be disastrous. Case studies will reveal that extent to which late payments can destroy a business. Take the case of Thomas Cook. Once the UK’s largest travel company, it went bankrupt in 2019 after failing to obtain a £200 million bailout from its creditors. One of the main reasons for its collapse was its inability to manage its cash flow, which was severely affected by late payments from customers. Another organization that folded was Prestwick Airport, the second-largest of its kind in Scotland. Its closing followed financial struggles that resulted from late payments from airlines.
Paying Higher Costs
Business that are pushed into debt by late payers end up accumulating poor-quality debt. Creditors are not likely to continue financing a risky venture, and those that do lend struggling businesses a hand are likely to do so with higher interest rates or fees. This issue is particularly pressing in industries such as construction and tech. For instance, construction companies often have to front the costs of materials and labour, and delayed payments often force them to take out loans to survive. Tech startups, meanwhile, have ongoing development and server hosting costs to honour. If late payments cause a startup to pay their own creditors late, then their credit rating could be affected, and they may have trouble securing favourable terms for loans in the future.
Safeguarding Your Company’s Future
Companies should take key steps to reduce the likelihood of late payment. Measures to consider include maintaining up-to-date cash flow projections (so you are better prepared to deal with shortfalls) and requesting upfront payment or requesting progress payment at key delivery stages. Some companies include late payment penalties in the contract, which is a good idea in the case of sizeable payments. In the case of a cash flow crisis, you have several options—including offering clients a discount for faster payment and arranging temporary credit with a trusted financial institution.
Late payments can have severe repercussions on a company’s cash flow and overall stability. Strained relationships with clients, higher staff turnover, and the inability to take on new projects are just some of the adverse effects. Moreover, businesses facing late payments may end up paying higher costs due to accumulating poor-quality debt. To safeguard their future, companies should implement strategies like upfront payments, cash flow projections, and late payment penalties. These measures can help maintain financial stability and protect against the detrimental impacts of late payments.
What can you do to get paid on time?
What practical steps can business owners take to address the late payment culture?
There is no easy answer but there are some solutions and approaches that business owners can put in place that can prevent many late payments.
We’ve written before about how businesses can take steps to prevent invoices being disputed, limit the effect of disputes and overcome disputes that still arise.
Communication and checking details are all correct on the documents can go along way to tackle those organisations that use queries as a way of slowing down payment of an invoice.
Chase that invoice
Did you know that 17% of cases of late payment occurred because the supplier didn’t chase the invoice.
Wow!
The reason behind one in every six late payments is that the supplier didn’t chase up payment of the invoice!
Don’t let that be you!
No matter how busy you are, as a business owner you always need to find the time to chase outstanding invoices.
If you can’t find the time, or don’t like the potential for confrontation that comes with chasing a late payment then pay someone else to do it for you.
The Credit Protection Association happy chases thousands of debtors every day on behalf of its members.
Acting as a third party in an ethical manner we are able to allow you to protect your personal relationship with the client.
Unlike other debt collectors, we do not operate on a percentage of the debts submitted to our overdue account recovery service as this is part of the subscription fee. We therefore encourage them to pay you direct and that also helps them maintain the relationship with you.
Our service also automatically sends a series of reminders by email and letter so you do not have to keep remembering to chase each week.
Let them know you will claim late payment compensation and interest.
It might surprise you to know that you can claim compensation, interest and third party debt recovery costs if another business is late paying you for goods or service.
The interest you can charge is called ‘statutory interest’ – this is 8% plus the Bank of England base rate for business to business transactions.
You can also charge a fixed sum of compensation to cover your costs and inconvenience when your business customer is late paying. The amount varies depending on the size of the debt and each invoice counts as an individual debt.
This is statutory right, so you do not need to spell it out in your terms or on your invoices. But if you are upfront about it with clients from the beginning and remind them when invoicing, it can encourage prompt payments.
In practice, you might not choose to use it, in order to maintain the goodwill but just discussing it, may be a suitable deterrent to deliberate late payment.
Many small businesses are reluctant to enforce this as it can damage the goodwill with a valuable customer. However, if you value your cash flow and you are repeatedly not getting paid on time by a client, then applying the interest and compensation might work as a tactic to get them to pay without actually taking legal action which would be the final step.
Getting payment up front at the point of sale is the best way to avoid late payments. But if your business or sector is based on offering credit terms to customers, then it is very likely that you will have some element of late payment at some stage.
Giving your customer as many ways to pay as possible can help. Can you give them your bank details on the invoice to encourage payments. Can you accept card payments, maybe even putting a facility on your website? Can you use direct debits? All are ways of avoiding late payments caused by inaction.
Do you practice what you preach?
We all want to encourage our clients to pay on time, but do we in turn have a policy of paying on time?
To end the late payment culture takes an effort from all of us.
And paying on time, means arranging the payment several days before the due date, not once the due date has passed.
Paying on time means the funds have cleared on the due date.
Doing so will support your suppliers to improve their own cash flow and strengthens your supply chain.
Developing strong commercial supplier relationships can be a win-win.
Collaborative relationships with customers and suppliers help encourage payments on time across the board and will mean you will be a preferred customer of your supplier.
Paying on time means they will likely be more willing to help you out in urgent times.
It places you in a better position to negotiate contracts with them and create positive relationships as your supplier no longer has to build the cost of late payment into your quote.
Summary
Late payment is the scourge of many a small business and damages the overall UK economy, reducing productivity and tying up capital that could be better deployed.
Many perfectly good companies experience cash flow problems caused by bad payers, that can be fatal. Others are forced to take advantage of expensive overdraft facilities and other sources of liquidity which impact on profit growth potential.
Breaking up the late payment culture and instead developing a culture of good payment practice across the UK business universe can have a dramatic affect on the UK.
By following the guidance above, you will be enabled to address the most common reasons why companies are not paying you on time.
Finally, don’t be afraid to turn down business from bad payers.
Sometime it is better to walk away from bad business if it is going to cause you significant problems in getting paid on time.
There are some customers it is just not worth having.
See our previous blog – The “Why” of the late payment culture.
Do you sell on credit?
With pressures on the cash flow it is essential that you stay on top of the credit limits you grant customers and watch carefully for any late payments.
Those customers will look for the easiest option to boost their cash-flow. Don’t let it be you.
You can’t just assume your customers can and will pay you eventually, no matter how big their name is.
It is essential to have credit management systems in place to monitor and check your customers credit worthiness.
It is also best practice to use a trusted third party like CPA to make sure you are paid on time by customers, no matter how good a name they have.
About CPA
The Credit Protection Association can help!
Formed in 1914, CPA has been providing credit management services to SMEs for over 100 years.
At the Credit Protection Association, we provide first class credit information that can help you avoid being over extended to customers who are at risk. Our monitoring service can flag up warning signs long before the end, giving you the chance to adjust and reduce your exposure. We provide recommended credit limits and credit scores on a traffic light system and can help you set appropriate credit policies for your customers.
We regularly publish lists of the latest insolvencies but by then it is too late. Our credit reports however predict approximately 96% of company insolvencies long before they arrive.
Companies in trouble usually have very bad cash flow and they try to deal with it by delaying payment to their suppliers, increasing your exposure to them.
If you supply on credit, help us help you identify the risks.
Why use a third party collector?
As a third party collector, we can also get your payments prioritised over those who are not as hot on collections. When you customer receives a letter from the Credit Protection Association regarding their outstanding account, they are going to want to get that resolved as a priority. Our overdue account recovery service can get your unpaid invoices to the top of their “to do” list and get your invoice paid.
Over the years we have collected billions in overdue invoices for our customers.
Our debt recovery and credit management services give our members the financial freedom needed to grow and prosper, while our new Late Payment Compensation department could unlock hidden potential and offer the compensation needed to springboard your business to success.
The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections
Ready to speak to an advisor?
Call us today
0330 053 9263
CPA is passionate about late payment
The Credit Protection Association has been protecting smaller firms against poor payment practices for over 100 years.
We are extremely passionate about breaking the late payment culture that holds back the UK economy and threatens many SMEs with cash flow difficulties being the single biggest killer of Britain’s small businesses.
If you were regularly paid late we can help. Those former customers used you to boost their own cashflow, regularly paying you late.
As a result you had extra costs, you had the distraction of having to chase payment, you had opportunity costs because your capital was tied up in their late invoices.
Under little used legislation, you are entitled to compensation for those late payments.
Now you can boost your own cash-flow.
CPA can help unearth the those hidden treasures.
We have the technology to reveal the compensation you are due and we have the extensive experience and expertise to then turn those claims into cash.
Yes, CPA can help you boost your business cash-flow.
Don’t let your bankers control you, contact CPA today.
The Credit Protection Association – Prompting Punctual Payments – Ethical, Effective, Efficient, Economical collections
Read our blog here on how to crack down on the late payment culture.
Read our blog here on how to give late payers the slap they need.
The “Why” of the late payment culture.
New PM should walk the walk and back small firms over late payments
Paying late is “crack cocaine” to big business.
Late payment culture risks “spiraling out of control”
visit our late payment compensation page
See our full blog and FAQ on late payment compensation
Do you realise you could be sitting on a fortune?
Late payments often result in a cash flow crunch and leave SMEs in need of a cash injection.
If you sold B2B on credit then there may be a hidden source of capital you can call on.
If you fancy an bit of extra cash in your business, rather than jumping through hoops with your bank, you could look to uncover the resources from an unexpected source within your own business.
Not many are aware but there could be a hidden fortune within your business, sitting there, just waiting to be uncovered and released.
We can help you uncover the pile of gold, you didn’t even know you were sitting on.
If you trade with other businesses and were often paid late then you could be entitled to significant compensation.
Under little known and under-utilised legislation your business could be due huge amounts in compensation that you didn’t even know about.
Let’s be clear – this is not a way to weaken any customer relationships you value. It is one that identifies who’s been paying late and then recover the potentially significant sums in compensation using Late Payment Legislation from businesses where the relationship has already ended.
You can pick and choose who you want us to follow up – but once we’ve agreed which companies you’d like to pursue compensation from it’s a fast process and there’s no financial outlay to you whatsoever. My team at CPA put its expertise to work to recover the compensation due and fight late payment culture.
That compensation could provide the cash boost your business needed.
But don’t delay, that compensation evaporates if not claimed within six years of the late payment.
How can CPA help?
CPA has developed a unique technology to dig into your accounting records and discover the cash injection you are due by means of compensation. The software does all the hard work. Our software interacts over the cloud with over 300 different software packages, working directly with your accounts package, just so long as it’s stored on a computer.
We recognise that most companies do not have the resources to spend time on the identification and calculation of Late Payment Compensation. Our service can produce an Analyses within just a few days with (usually) less than 30 mins of co-operation from our clients. We work directly with over 300 accounting packages but can also work with bespoke accounts packages. Indeed, speed is essential as the oldest invoices may fall foul of the 6-year time limit.
Once the Sales Ledger Analyses is made available to clients, all that is required is that management decide which commercially sensitive ex-customers to remove from the list and return it to us.
CPA then uses its years of collection experience to explain and recover the Late Payment Compensation Claims. Clients do not handle any part of the recovery process as our team will take all communications from the companies against who the claims has been made. Often, it’s simply a case of explaining the legislation, sometimes we have to go all the way and enforce the legislation through the courts.
The result is that we are realising clients’ claims worth tens and sometimes hundreds of thousands of pounds which, of course, is pure net profit. You may also be among the recipients of “hundreds of thousands of pounds” should you elect to take advantage of our services.
We do the work, you receive the cash.
If you have supplied goods and services to businesses on credit and were regularly paid late then you could be due significant sums in late payment compensation.
We are talking to companies and unearthing claims in the hundreds of thousands from former business customers who paid them late. Large business customers who abused their power to inflict unfair and sometimes illegal payment practices.
We are helping business owners who are looking to boost the returns from their business before they retire. We are helping businesses who have lost major clients after years of loyal service to get properly compensated for systematic late payment. We are helping companies that were looking to close down, who looked insolvent and finding that cash injection they need to avoid insolvency.
Those former clients who regularly paid you late can finally be made to pay.
Ready to speak to an advisor?
Call us today