Small businesses that are already often operating at a loss are facing the increasing risks of an ever-worsening late payment crisis. This ‘crisis’ costs small businesses billions each year, while many European businesses also pay as much as €275 billion to chase late payments. And those figures only look set to rise as the situation escalates.
This is incredibly bad news for small businesses and SMEs that are already operating on shoestring budgets, with even one monthly missed payment presenting the risk of unpaid bills and potential closure. Unfortunately, small business owners also don’t always have the power or business understanding to face this challenge head-on. And, customers and businesses alike clearly know that, resulting in an escalating problem that’s already heralded the closure of countless key companies in the past few years.
As the situation comes to a head, more companies than ever are asking one all-important question – what can we actually do about this crippling crisis? We attempt to answer that question and more throughout this article.
The Problem at a Glance
Before we can begin to understand the potential solutions, let’s delve into the late payment crisis itself.
In Europe alone, this global problem is resulting in the bankruptcy of countless small businesses awaiting invoice payments. Worldwide, late payments have resulted in –
- Global economy losses as high as $40 billion
- Preventing business growth in 89% of cases
- An estimated 56.4 million hours spent chasing late payments
Late Payments: The Government’s Stance on Big Business Debts
While it’s easy to assume that late customer payments are the main culprits in this crisis, that’s far from the truth. In reality, big business contracts with small businesses and SMEs are by far the most regularly unpaid. What’s more, the substantial size of these contracts means that even just one or two short payment delays could prove catastrophic. That’s incredibly bad form from big businesses, and it’s making things harder than ever for small business owners.
Luckily, this is an issue that global governments are obviously aware of. Most recently, the UK’s labour government has introduced small business support packages and strict payment regulations. The European Commission has also outlined late payment regulations, which include –
- A 30-day payment deadline in most cases
- Automatic imposition of interest on late payments
- Compensation fees
- And more
Perhaps most promisingly for small business owners, the European Commission has also outlined its intention to provide financial literacy training for SMEs. This ensures a more adept handle on small business finances and an improved understanding of payment processes in general. This, alone, will prove vital considering that administrative errors are one of the main reasons for late payments.
However, since this initial proposal, changes have been implemented, including a 120-day payment term for seasonal and slow-moving products, as well as flat-fee compensation of up to EUR 150 on late payments over EUR 15,000. This, alongside a lack of monitoring tools to effectively put these plans into place, still poses a problem for small business owners who are currently impacted by the crisis.
Navigating The Customer Side of the Crisis
Unfortunately, the late payment crisis isn’t only relevant to B2B interactions. Even private clients can be guilty of unauthorised debt, particularly in invoice-based fields like construction and landscaping. In fact, 75% of UK construction companies experience some degree of late payments. Worse, government plans that solely target big business dealings don’t look set to improve this situation in any real way.
Common reasons for late client payments can include cash flow problems, forgetfulness, or disputes, but they all pose the same pressing problem – companies have to continue operating without payment. What’s more, this issue feeds back into the problem of unpaid big business contracts, with many larger companies unwilling to make good on their accounts until clients pay on their end.
One of the best things businesses can do in this instance is to simply offer financing to customers who are then far more likely to make small, manageable payment dates. What’s more, offering financing through a company like Avvance means businesses can secure immediate payment in full, even with financing in place. That makes missed payments a lot less likely in general.
Many small business owners also face the risk of simply not knowing what to do if invoices go overdue. After all, small business reputations are fundamental, so it’s important to take a gentle approach that might not always reap fruit. Education regarding things like late payment emails or notifications is key to overcoming this, and could come from government initiatives or private efforts. By sending as many as three firm yet professional late payment notices, companies can increase the chances of invoice fulfilment, as well as provide an opportunity to highlight any financing payment plans as an alternative. The paper trail that this creates can also serve as vital evidence if invoices remain unpaid and legal action becomes necessary.
Understanding the Legal Steps of Missed Payments
If all else has failed and payment still isn’t forthcoming, even budding small business owners must know the best steps they can take. After all, many late payments are written off the books because business owners are either too wary or too uninformed, regarding their options.
This is especially true when considering the risk of reputational damage when pursuing strict legal actions like debt collection or court proceedings. Not to mention that, often, small businesses would lose more money with these options than they would from simply writing off a debt in the first place.
In truth, though, there are far less damaging potential legal steps concerning missed payments, especially with current government crackdowns. With every account on file, small business should start by keeping a clear account of –
- Initial invoices
- Work completed
- Late payment emails and reminders
- Any client communication, including failure to respond
With this information to hand, there’s far less risk that even big businesses will be able to shirk payment responsibilities.
It’s also important for SMEs to understand that there are various options for debt collection, including partnerships with companies that provide gentle debt collection and a focus on arranging payment plans, rather than pursuing financially and reputationally costly legal recourse. These businesses, which often operate on a subscription basis, can ultimately save SMEs significant time and money, as well as making it more likely that late payment clients will be willing to continue this business relationship into the future.
Takeaway: Coming Out of The Crisis
There’s no underestimating the accounting challenges inherent in the late payment crisis, which is proving particularly harmful to small businesses across Europe and the rest of the world. Yet, our economy depends on these companies, who drive economic growth and employment in vital ways.
While it’s heartening that governments are beginning to address the pressing problem of B2B contract missed payments, this, in itself, has not yet proven an effective way to tackle the issue. To achieve that, companies need to do what they can to simplify the payment process, while also developing a clearer plan for decided action when debts stretch past a certain date.
The future is uncertain and, on the surface, the late crisis payment looks set to get worse before it gets better. Still, small businesses can improve their position with finance plans, late payment emails, and proper filing for every single account on their books. If all else fails, preliminary checks including credit checks and affordability assessments, make it far less likely that a client will default on their payments for any reason.