It’s an entrepreneur’s nightmare scenario: You land a big deal, you ramp up to deliver on time, the customer/client is happy, they’re thinking about reordering. Everything’s great, right? Wrong. You’re still waiting to get paid—and those net-60 terms you agreed to reluctantly (since you were so excited to get the business) have come and gone.
Well, you’re not alone. One of the biggest struggles many small businesses have may be getting paid on time, which can be key to properly managing cash flow. According to Dun & Bradstreet, 90 percent of small-business failures are due to poor cash flow.
This report is underscored by a survey from Fundbox, a cash flow optimization platform for small businesses, which recently released data based on an analysis of 20 million invoice payments in its system. The study revealed the problem of late payments to small businesses is “widespread”—in fact, 64 percent of small businesses are affected by late payments on their open invoices—to the tune of $26.2 billion.
Fundbox’s analysis illustrates the direct relationship between getting paid late and struggling with cash flow. The study shows 48 percent of all net-30 invoices, 45 percent of net-60 invoices and 35 percent of net-90 invoices are paid late.
Hard Hit Industries and Locations
Some industries seem to be more affected than others by late payments, including:
- Cleaning services
- Accounting and bookkeeping
- Web design
- Landscaping service
- Construction trades
Those industries can be particularly dependent on labor, which means business owners are likely struggling to make payroll, since they’re not getting paid in a timely fashion—but have to pay their employees on a regular basis.
Another variable affecting payment time is location. Small-business owners in some states may have to wait longer to get paid. The three states where entrepreneurs have to wait the longest to get paid are: Alaska (54 days on average); Iowa (63 days on average); and Hawaii, where it takes 95 days on average to receive payment. On the other hand, if your business is in South Dakota (23 days), North Dakota (21 days) or Wyoming (17 days), you may get paid faster.
The problem, according to Jordan MacAvoy, vice president of marketing at Fundbox, is “the common practice of net 30, 60, 90+ terms, puts incredible pressure on small businesses.” And paradoxically, MacAvoy adds, “The problem is amplified in healthy, growing businesses where short-term expenses increase before additional income can be captured.”
Changing the Process
If any of this sounds painfully familiar, what can you do? You can’t force the companies you do business with to pay you faster, but you can perhaps speed the process along.
On its blog, Fundera, a marketplace that matches entrepreneurs with providers of alternative funding, advises you start by improving your collections process. It suggests offering incentives to clients who pay early, such as discounts, accepting electronic payments or negotiating “milestone payments,” meaning you get paid as you work your way through the project.
Of course, you should consider running a credit check before you sign a contract with any company. And if that turns up a history of slow payments, it might not be worth it to do business with that company.
Read more articles about cash flow.