Late payments are a common challenge for small businesses. In fact, nearly half of invoices issued by small businesses aren't paid on time. As a result of this, nearly 26% of businesses then struggle to pay their own invoices, triggering a cycle of late payments that can stifle growth and diminish your competitive edge.
"Aside from it being the right thing to do and better for all businesses in the longer term, there are now much more serious risks and penalties for those businesses that don’t pay on time," says Mark O’Mahoney, senior corporate affairs manager at Be the Business, a not-for-profit organisation providing free advice and resources to small businesses. And these risks extend much further than simply accruing late payment charges.
Here's a look at how late payments can damage your business and some simple ways to prevent it from happening.
Why do late payments happen?
A common reason for late payments is inefficient internal processes, which can mean invoice dates are forgotten or missed. "Very often, cash flow challenges can arise from business owners just not having the time and capacity to keep on top of invoices," says O'Mahoney.
In fact, 40% of financial decision makers say inefficient processes limit their ability to pay on time. Whatever your reasons, identifying what they are will help you to find solutions. Our article on how technology can help you better manage your business' cash flow could be a helpful place to start.
How late payments can harm your small business
You’ll pay over the odds
Paying your invoices late can quickly accrue expensive late-payment charges, which means you'll be paying more than you should for the goods or services provided. A cost that you cannot easily pass onto your customers. In fact, UK businesses have a legal right to charge 8% interest, plus the Bank of England base rate for late business-to-business transactions, as well as the costs incurred in recovering a late payment.
It can lower your sales
Suppliers can sever ties with your business should you consistently pay them late. This can a leave a gap in your supply chain that cannot easily be fulfilled, leading to a reduced product or service line, disgruntled customers and lower sales.
It diminishes your bargaining power
Damaging your relationship with one supplier not only hinders your ability to negotiate the best rates and terms, it can also ripple through the industry, making it hard to find new suppliers if and when you need to.
It makes you less competitive
Paying late can mean missing out on special offers from suppliers, as well as rewards for paying on time and the ability to call in a "favour" when needed, says Andrew Goodacre, CEO of the British Independent Retailers Association. Paying your suppliers on time and on-terms is a competitive differentiator and in fact, our research shows one-third of small companies that have paid late have had suppliers withhold their good or services.
It stifles growth
Late payments can quickly accrue, damaging your cash flow and leaving you with little bandwidth to reinvest in growth. As many as 50,000 businesses fail each year due to cash flow issues. It also decreases your business resiliency, making it tougher to weather unforeseen hard times.
4 ways to pay your suppliers on-time
1. Automate your processes
Use accounting software to monitor and automate your payments in real-time. Many platforms, such as Xero and Quickbooks, enable you to schedule ad-hoc and regular payments, track your bills and forecast your cash flow. This can save you so much time, with research showing that small companies spend nearly 30% of their working day on unprofitable financial administration.
2. Examine your business model
Consider whether you can better align your supplier payment terms with your incomings, for stronger cash flow. For example, by shifting to a subscription model to receive more regular payments, by requesting a deposit or payment from clients upfront or by reducing your invoice period. While invoices with shorter payment terms may still be paid late, you will likely receive your money sooner than if you allow three or four weeks to pay.
3. Negotiate with your suppliers
If the payment terms aren’t working for your business, try negotiating with your suppliers for a longer payment period. It’s much better to work collaboratively to find a solution, rather than consistently paying them late.
4. Monitor your inventory
Consider sharing plans, forecasts and data with your suppliers to better manage your stock levels. Not only will this help you react quickly to changes in demand, it will also ensure you only ever order and therefore pay, for what you need.
An American Express® Business Card can help you manage supplier payments by giving you up to 54 days¹ to clear your balance. That means you could pay your suppliers on time using the Card, then have up to 54 extra days before repaying the balance, using income from customers or clients that has cleared in the meantime. Plus, you can earn Membership Rewards® points – and use them to reinvest into your business – every time you make these payments.²
Find out more about American Express Business Cards.
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.