Late payment is the single most common type of cash flow interruption faced by businesses all over the developed world. Faced with growing scrutiny from the ASBFEO, the Australian government, and major businesses in recent years, it’s become a high profile issue concerning particularly SMEs. Cash flow interruptions, like late payments, can hamper a business’ ability to grow, interrupt growth plans and make it extremely difficult to budget reliably for the future.
Moreover, the time spent by business owners chasing down late payments interferes with their ability to grow their business, costing them an average of 8 hours per week. Because of this, finding ways to avoid late payment is a critical concern for businesses. To accomplish that, though, businesses need to get proactive about managing incoming revenues.
Set clear contractual payment standards
Ideally, businesses can prevent late payment by securing a contract with clear rules surrounding payment, and the consequences of late payment. For example, businesses can attempt to negotiate for partial up-front payment, or set up a credit policy charging customers’ interest on unpaid invoices.
Bill early and take a deposit
Businesses, particularly large companies with a large bureaucracy, can take a long time to process an invoice. This is particularly true if that invoice isn’t seen as a priority. To get around this problem, businesses might consider requiring an ‘up-front’ deposit before beginning work on any particular project. By putting the progress of the project on the line, this is a way businesses can enlist the help of their client’s point of contact to push for payment of their invoice internally.
Institute interest payments on overdue accounts
The prospect of stopping work on a project, if payment is late, might be unacceptable for some businesses. In cases like this, businesses can charge interest on overdue accounts. Keep in mind when doing this, though, that interest is required to be “fair and reasonable” to be legally enforceable. It’s best to contractually set an interest rate at the start of the relationship.
Offer an early payment discount
Many businesses — particularly ones that are much smaller than their clients — don’t have the influence to secure favourable contract terms for risk of losing the client. In cases like this, a better approach is to provide an incentive to ensure timely payment, such as offering a discount if payment is made before the due date.
If a client is using supply chain finance, this can be particularly beneficial to both parties. Supply chain finance allows the supplier to request early payment, whenever they want it, in exchange for a discount. If the procurer agrees, they can accept the request, and payment is made by the procurer’s financial institution. While this type of financing is technically meant to serve the client business, it inherently also benefits the supplier, by providing them with the ability to negotiate for early payment in a clear-cut and structured way.
Use invoice finance
Waiting for revenues to trickle in can be a frustrating experience for businesses that have a lot of investments to make, but little working capital to spend on them. Waiting for invoices to become due, however, isn’t always necessary. In fact, businesses don’t need to wait for customers to pay their invoices at all. Instead, they can use invoice financing to get paid almost immediately. To finance an invoice, they can give it to a financial institution, for example Fifo Capital, in exchange for an up-front payment reflecting the majority of its value. Then, the financial institution takes payment from the client, before claiming their fee and paying out the remaining balance.
Get more respect from clients
Invoice financing is useful for all kinds of businesses, however it can particularly benefit those who suffer from late payment issues. Often, this is because their invoices aren’t prioritised for payment by their clients. Many businesses have little compunction about paying an invoice late if they’re experiencing cash flow issues, also they may not believe they will face any consequences. When using invoice finance, however, the financial institution that accepted the invoice will collect payment. This greatly improves the probability of the customer paying their invoice on time, as people will naturally take requests for payment much more seriously when they come from a financial institution, rather than a smaller supplier.
To determine the best course of action for your business, it’s important to consider your particular business’ situation and what approach is likely to work best for you. To learn more about the financing options available to your business, we encourage you to get in touch with one of our financial representatives at Fifo Capital.