How do late payments affect growth? What should be done?

Did you skip the last unsecured business loan payment? Late payments remain one of the consistent problems of startups. There could be any reason behind missing a payment. It could be slow sales, business loss, economic impact, or emergency expense. Whatever the reason, late payments affect your credit report. It mirrors you in a negative light, and your credit score drops.  

It is because non-repayments lead to a debt-trap, which is deemed risky by the creditors. Hence, they may even send a CCJ to retrieve their loss. So, is it too late to act? Well, no. You can still manage the situation. The blog lists the impact of late payments on business growth and the steps to take to limit the damage. 

The Scale of Late Payments in the UK 

The scale of late payments affects multiple businesses in the UK. Whether you are a startup or an established firm, you need to know a few facts. 

• The businesses in the UK owe 10 million pounds of invoices overdue at any point in time. 

• Small businesses wait for an average of 40 days to receive payments from clients. It is even when they agree upon early payments or shorter terms. 

• Late payments are a consistent contributor to SME insolvency declarations. The number is huge. 

Ways in which late payments affect business growth 

You can see the state of late payments and the side effects. Let’s delve deeper into the approach:  

Disrupts the cash flow 

Businesses need consistent cash to deliver on the personal and client expectations. However, businesses also need to pay:  

• staff wages 

•  rent 

• Utilities 

• Suppliers 

• Subcontractors 

• VAT 

•  tax liabilities 

Thus, late client payments force one to dip into the savings and rely on costly overdrafts to meet the basic requirements.  It thus creates a knock-on impact on the supply chain.  

Reduces the ability to grow 

Cash tied up in unpaid invoices cannot be invested. Thus, it limits a business’s ability to: 

• Take on new contracts 

• Invest in equipment or technology’ 

• Hire additional staff 

• Increases expenses on marketing  

Thus, it restrains the ability of a business to grow, as late-paying customers cannot be called for everyone. 

Depend on external loans for business needs  

Not having sufficient cash affects the ability to achieve business goals timely manner. Thus, most companies depend on overdrafts, loans, and credit cards to fund the requirements. 

  While loans may not affect the revenue much, costly alternatives like overdrafts and credit cards do. It replenishes one of the basic financial stability measures. Moreover, this instead increases the liability on the business with increased interest and high costs.  

Affects time and productivity loss 

Chasing late payments consumes valuable management time. Business owners and financial teams spend more time on:  

• Sending reminders in the form of texts, emails and voice messages 

• Making follow-up calls regarding payments 

• Managing disputes regarding late payments and providing solutions 

Increases the risk of insolvency 

For smaller businesses with limited reserves, persistent late payments can be challenging. Moreover, profitable businesses may fail if: 

• Cash flow becomes unpredictable 

• Failure in meeting tax liabilities 

• Delayed payrolls 

Therefore, late payments are often cited as a key factor in SME business closures. 

How to counter late payments the right way?  

Here is how to counter late payments the best way:  

Consolidate the costly debts 

Debt consolidation is the quickest way to get instant access to cash. You can merge and pay incredibly low interest, a monthly payment and a total amount on high-interest debts, especially.  

You can check the best debt consolidation loans to consolidate business credit cards, business loans, overdrafts and other costly debts. It helps you pay only one creditor instead of dealing with multiple creditors. Moreover, it provides massive relief for your credit score and provides greater flexibility over finances.  

Set stringent payment terms from the start 

Sometimes, it is ideal to review your business payment policies. It helps you optimise the terms according to the latest legal payment standards. For example, if you grant a 40-day window for payments, reduce it to 20 days. It helps you get your payments quickly. Good clients support the business approach and thus align with the new rules.  

 Also, include more payment methods in your invoice. Check the most used ones and provide the facility. You can also provide a discount on the next order for clients paying within 10 days of the service. It may help you get the needed cash to sustain business operations.  

 Create accurate invoices 

Delays and errors give customers the excuse to delay the payment. Thus, always check your invoice before mailing it to the customer. Check the billing date, the last date to receive the payment and the terms. Sometimes, a mere mistake like paying the bill in 30 days instead of 20 days may prove a blunder.  

Moreover, most businesses have the legal right to charge statutory interest and late payment compensation for usually late-paying clients. It is valid under the Late Payment Commercial Debt  Legislation.  

Credit check the new customers  

It is important to understand the potential for the customer to pay the dues timely. Determine one by conducting a basic credit assessment. Analyse the person’s income, debts, and monthly expenses. It may help you determine whether they may be able to repay the dues timely.  

If not, then you can draft stricter terms with them or may not proceed as a business with them. Alternatively, you may provide good payment options, flexibility to those with a good payment record.  You can also request deposits where the risk is high.  It is particularly important to do so while working with new and rapidly growing clients.   

Offer incentives for prompt payment 

Yes, it could be a good way to encourage clients to pay quickly. It helps you meet your needs timely manner without waiting for the client’s payment. Here is how to encourage your clients to pay early:  

• Offer small discounts for early settlement 

• Preferred terms for reliable payers 

It may improve cash flow without impacting relationships. 

Bottom line 

Thus, late client payments affect your ability to achieve business goals timely manner. However, you can take steps actively to improve the client payment policies. You can reduce the last payment days, provide early payment discounts, or offer better opportunities for the next term. Identify and follow up with clients regularly, and check legal ways to counter the situation.