Making timely payments is best practice for any company that values its reputation and relationships. But there are also more serious risks and penalties at stake for companies that lag in paying vendors and suppliers – which can ultimately hinder a company's ability to stay afloat.
Here’s a look at the potential impacts of making late payments and how delayed remittances can damage your business, plus some ways to prevent this vicious cycle from happening in the first place.
Why Do Late Payments Happen?
There are multiple reasons why businesses contend with late payments. For one, cash flow gaps can make it hard to pay suppliers on time. Inefficient internal processes also factor heavily, with forgotten or missed invoice dates putting payments well behind schedule. Management lapses can take their toll, too. When multi-tasking leaders are spread too thin, they may lack the focus needed to adhere to invoice payment schedules.
But internal inefficiencies aren’t the only cause of late payments. As per the 2023 Atradius Payment Practices Barometer, which surveyed 650 businesses in North America, invoice disputes also played an outsized role in delayed payments. Invoice disputes are disagreements between clients and suppliers over invoiced charges, quantities, or terms. They often stem from errors, misunderstandings, or non-compliance with agreed-upon conditions.
How Late Payments Can Harm Your Small Business
No matter the reason a business makes a late payment – whether due to cash flow gaps, invoice oversights, or short-staffed operations – the ramifications can be detrimental and, if left to spiral, can prove difficult to remedy. Here are a few reasons to avoid making late payments as a small business.
You may incur expensive late fees.
Late payments often incur expensive late-payment charges or interest, meaning you’d be essentially paying more than you should for the goods or services provided. Late payment fees should be spelled out on your invoice and in your contract with your supplier, if applicable.
It could hurt supplier relationships.
If you consistently pay suppliers late, frustrations could mount. Suppliers could eventually sever ties with your business, leaving a gap in your supply chain that cannot easily be remedied. That could lead to a reduced product or service line, disgruntled customers, and lower sales. Worse, a reputation for late payments could ripple through the industry, making it hard to find new suppliers when you need them – especially if your business credit takes a hit.
You could lose bargaining power.
Paying your suppliers late may leave you out in the cold as far as negotiating better terms, extended payment periods, special offers, or simply enjoying early payment discounts. These benefits could provide meaningful savings and flexibility for small businesses with tight cash flow. And a track record of late payments doesn't just hinder your ability to negotiate the best rates, terms, and discounts. Once trust is eroded, your suppliers may no longer prioritize your business or any service issues you have. It’s possible they could even bump up prices.
It can stifle growth and endanger survival.
If you’re consistently paying late, you might find yourself always playing catch-up, which can make it difficult to manage and forecast cash flow effectively. And without smooth cash flow, businesses may be left with little bandwidth to not only reinvest in growth, but stay afloat. Cash flow is one of the top factors impacting small business survival rates.
Four Ways to Pay Your Suppliers on Time
Taking proactive steps such as automating payments, negotiating terms with suppliers, sharing inventory forecasts, and pivoting to a different business model can help small and medium sized businesses eliminate delayed payments and improve cash flow.
1. Automate your processes.
Using accounting software to monitor and automate your payments in real-time is becoming more of a necessity. According to the November 2023 Accounts Payable and Receivable Trends and the Path to Profitability report, produced by PYMNTS Intelligence and American Express, 85% of executives at mid-sized firms reported that AP automation is paramount for efficient, accurate, and streamlined processes. And nearly three-quarters reported that automation improves cash flow, boosts savings, or increases business growth. The report is based on a June 2023 survey of 412 executives.
2. Examine your business model.
Your company’s cash flow can impact payroll, everyday expenses, the ability to invest in your business, and payments to the very suppliers that keep your wheels turning. For stronger cash flow, consider whether you can better sync your supplier payment terms with your incoming payments. For example, switching to a membership or subscription model might allow you to receive more regular payments from customers and prevent the cash flow crunches that can lead to your own business making late payments. Other ways to improve cash flow include requesting a deposit or full payment from clients upfront, or reducing your invoice period.
Switching to a membership or subscription model might allow you to receive more regular payments from customers and prevent the cash flow crunches that can lead to your own business making late payments.
3. Negotiate with your suppliers.
If the payment terms aren’t working for your business – and you haven’t already soiled your reputation with consistent late payments – try negotiating with your suppliers for a longer payment period. Note that it’s much better to work collaboratively and proactively to find a solution, rather than getting into the habit of paying late. Before approaching suppliers, consider having a cash flow projection plan in place so you understand what you can afford to pay and when. It’s also wise to review your contract to get a firm grasp on your rights, cancellation clauses, late payment fees, and other terms.
4. Monitor your inventory.
Customizable inventory software can give you a real-time read on stock levels, helping you track items as they move through the supply chain, and keep close tabs on performance. In turn, this can help you react quickly to changes in demand, while ensuring you only order and pay for what you need. This can minimize the risk of shelling out unnecessary cash, benefitting your cash flow and making it easier to stay on track of payments.
The Bottom Line
Several factors contribute to late payments to suppliers, from invoicing inefficiencies to invoice disputes. But making late payments is costly and can unravel small businesses by inhibiting growth and hurting supplier relationships. By taking action, whether proactively negotiating new terms with suppliers or automating payment processes, small businesses can turn the ship around. And the benefits are worth it: In addition to bolstering your reputation, prompt payments may incentivize suppliers to prioritize your company and even award discounts over the long term, helping to improve your bottom line.
A version of this article was originally published August 25, 2020
Photo: Getty Images
