Small businesses often struggle much more than large corporations; with weaker cash flows and limited growth opportunities, SMBs typically have greater financial restraints and less leeway regardingthe margin of error. One of the biggest problems a small business faces is late payments – clients taking their sweet time to pay invoices is a significant burden with a domino effect that can lead to snowballing issues. Here are some of the ways late payments can impact a small business – both in the short and long term.
Inability to Grow
Cashflow can suffer when a business doesn’t receive payment on time; lack of working capital means an SMB may be unable to take on new clients and larger projects and purchase supplies or equipment for more prosperous opportunities. The effect leads to reduced sales and a subsequent lack of growth. Furthermore,a cashflow shortage could render a small business unable to pay operating expenditures, hinderingits smooth operations.
There are various solutions to prevent these problems (and the further knock-on issues detailed below)from worsening,withdebt factoring (also known as invoice factoring) being popular among small businesses.This fast financial solution provides funds against outstanding sales invoices and new invoices as they are raised, meaning a small companycan maintain working capital to boost cash flow – and relatively quickly.
Many companies offer this type of funding to small businesses, so seeking an independent quote search from a specialist debt/invoice factoring broker like FundInvoice.co.uk is ideal. These types of brokers put their clients in contact with the best companies that provide factoring services, helping them secure the appropriate factoring for their small businesses.
Severed Commercial Relationships with Suppliers
When customers don’t pay on time, the reduced cash flow may leavea business unable to pay its suppliers on time, affecting professional relationships.In addition, suppliers may no longer wish to trade with a company that fails to pay invoices on time; thus, commercial relationships can suffer and may be cut entirely.
Poor Credit Rating
Clients’ late payments can potentially dent an SMB’s credit rating. The shortfall in available cash flow could leave a business with insufficient funds to pay any applicable creditors, be it loans or credit cards. The inability to pay creditors on time may affect the business’s credit rating since late payments are factored into credit scores. When credit score receives a hit, it can be significantly more challenging, not to mention expensive, to secure future credit.
While this situation is the worst-case scenario, it’s all too real. As discussed, the impacts of late payments can:
- Negatively impact cash flow
- Reduce opportunities for growth and new sales
- Render a company unable to pay suppliers
- Damage professional relations between the business and its suppliers
- Negatively impact the company’s credit rating
- Leave a business incapable of paying its day-to-day operating costs
The cumulative effect of these problems can become so severe that a business may be forced to close down.
Carefully managing cash flow is crucial, even in the face of late payments. As such, companies must manage their invoicing and collection processes and ensure prompt payments from all clients.
At the same time, a backup plan to offer solutions when faced with late payments is essential. As mentioned, options such as invoice and debt factoring should be part of a company’sdue procedures to mitigate the damage caused by late payments and upholdoperational needs.