How Late Payments Affect the Smb

Jonathan Horne, Head of Marketing at Basware

Late payments are unfortunately a fact of life, and affect every business large and small thanks to its knock on effect down the collaborative supply chain.

 Moreover when we think about how late payments effect the SMB enterprise we traditionally tend to focus on the pure capital aspect of the cash not coming in on time, and the pressure this has on the bank balance. Whilst not dismissing this pain point area, there are also many operational and social pressures that are also the results of late payments that equally effect the continuity and effectiveness of the SMB.

 For example, employment. For every SMB it is a balancing act of having enough staff coverage to run the business efficiently, whilst at the same time having the flexibility to scale up and down as demand ebbs and flows. With more and more government red tape and increased base cost from ever increasing minimum wages and additional pension contributions on top, the margin that the SMB has to play with when cash flow is tight becomes every more fraught.

 So when we thrown in not just late payment, but also the unknown payment date it is not surprising that the one of the first potential casualties of the business will be its staff. This then has a very unstable effect of the operational aspects of the entire business as it tries to do more with less.

 Commercial relationships can suffer as nobody enjoys chasing owed money, or for that matter being chased for money. As more and more companies look to reduce the number of vendors they work with to streamline processes, ensure quality constancy and benefit from economies of scale, the relationship aspect becomes more and more to the fore. Most SMBs love the idea of expanded relationships with core customers, of becoming a preferred supplier, it means from their side they also benefit from economies of scale – but at a cost. What happens when payments are still late, and you have increased your commitment and exposure to your own suppliers?

 In these examples everybody potentially loses, including the economy. Multiple SMBs can go out of business, with the loss of jobs across the whole supply chain. The big buyers at the top of the supply chain also suffer as they need to revamp their supply base, this in turn pushes up the cost of the end product that us consumers buy so we too have to share part of the burden.

 So let me go back to the first sentence, late payments are a fact of life. How does this directly effect the SMB? Firstly it is operational visibility, if the SMB owner or financial controller don’t have at least an idea of when the late payment will be made they are unable to make any concrete plans on the immediate future direction of the company. They do not the ability to be agile and move with new growth opportunities. This may very well lead them to miss out on, or choose not to accept new contracts as they are fearful of over extending their financial exposure. They also run the risk of running up ongoing late payment fines to their suppliers as mandated by the government, so further eroding their bottom line.

 So what does the SMB do in order to try to combat the effects of late payments on their financial supply chain? Well presuming that they don’t have enough free cash on the balance sheet to cover their own commitments, then first port of call is normally their bank for a credit facility in the shape of either an overdraft or loan. Either option can be expensive and take several days to arrange due to stringent credit checks and paperwork.

 Other options can include invoice factoring, which can release part of the value of your outstanding unpaid invoices, however, again this can be an expensive way to release your trapped cash flow. Normally you will receive only a percentage of the invoice value (typically between 50 and 75%) and for this you will be paying a considerable interest percentage over and above the base rate, plus more often than not legal fees, set up fees and annual contract fees.

 Of course there is third way that doesn’t hit your outstanding cash flow in quite such a hard manner, and that is to work collaboratively with your supply chain partners. By opting into a business network platform with your buyers you are able to send your invoices directly to your buyers. Just by this action of automated increased visibility, your buyer is able to offer you several options for you to work better together. Your buyer can propose a Dynamic Discounting opportunity where for a very small reduction, say 1 or 2% you can be paid immediately. Or alternatively there is an opportunity for all your invoices to be paid on approval by default, again for a very small percentage administration fee via a third party processor like MasterCard. And finally, should you not wish to benefit from a buyer lead incentive, then there is always the opportunity to directly finance a 100% of your invoice through a company like Clear Funding. This new solution provides turnkey funding without contracts and administration fees, and is tied directly to the business network, so the ability to finance individual invoices as cash flow requires can be done in just a couple of clicks.

 So if we take a final step back and look how SMB’s suffer from late payments, then aside from the missing cash, it is the supply chain relationships both inside the company and with buyers that suffer most. It is the lack of visibility as to payment status and payment date means growth and scalability is severely compromised, and this is where most SMB’s should look in order to release the cash trapped in the supply chain. Without supply chain visibility there can be no absolutes.

Jonathan Horne, Head of Marketing at Basware

Late payments are unfortunately a fact of life, and affect every business large and small thanks to its knock on effect down the collaborative supply chain.

 Moreover when we think about how late payments effect the SMB enterprise we traditionally tend to focus on the pure capital aspect of the cash not coming in on time, and the pressure this has on the bank balance. Whilst not dismissing this pain point area, there are also many operational and social pressures that are also the results of late payments that equally effect the continuity and effectiveness of the SMB.

 For example, employment. For every SMB it is a balancing act of having enough staff coverage to run the business efficiently, whilst at the same time having the flexibility to scale up and down as demand ebbs and flows. With more and more government red tape and increased base cost from ever increasing minimum wages and additional pension contributions on top, the margin that the SMB has to play with when cash flow is tight becomes every more fraught.

 So when we thrown in not just late payment, but also the unknown payment date it is not surprising that the one of the first potential casualties of the business will be its staff. This then has a very unstable effect of the operational aspects of the entire business as it tries to do more with less.

 Commercial relationships can suffer as nobody enjoys chasing owed money, or for that matter being chased for money. As more and more companies look to reduce the number of vendors they work with to streamline processes, ensure quality constancy and benefit from economies of scale, the relationship aspect becomes more and more to the fore. Most SMBs love the idea of expanded relationships with core customers, of becoming a preferred supplier, it means from their side they also benefit from economies of scale – but at a cost. What happens when payments are still late, and you have increased your commitment and exposure to your own suppliers?

 In these examples everybody potentially loses, including the economy. Multiple SMBs can go out of business, with the loss of jobs across the whole supply chain. The big buyers at the top of the supply chain also suffer as they need to revamp their supply base, this in turn pushes up the cost of the end product that us consumers buy so we too have to share part of the burden.

 So let me go back to the first sentence, late payments are a fact of life. How does this directly effect the SMB? Firstly it is operational visibility, if the SMB owner or financial controller don’t have at least an idea of when the late payment will be made they are unable to make any concrete plans on the immediate future direction of the company. They do not the ability to be agile and move with new growth opportunities. This may very well lead them to miss out on, or choose not to accept new contracts as they are fearful of over extending their financial exposure. They also run the risk of running up ongoing late payment fines to their suppliers as mandated by the government, so further eroding their bottom line.

 So what does the SMB do in order to try to combat the effects of late payments on their financial supply chain? Well presuming that they don’t have enough free cash on the balance sheet to cover their own commitments, then first port of call is normally their bank for a credit facility in the shape of either an overdraft or loan. Either option can be expensive and take several days to arrange due to stringent credit checks and paperwork.

 Other options can include invoice factoring, which can release part of the value of your outstanding unpaid invoices, however, again this can be an expensive way to release your trapped cash flow. Normally you will receive only a percentage of the invoice value (typically between 50 and 75%) and for this you will be paying a considerable interest percentage over and above the base rate, plus more often than not legal fees, set up fees and annual contract fees.

 Of course there is third way that doesn’t hit your outstanding cash flow in quite such a hard manner, and that is to work collaboratively with your supply chain partners. By opting into a business network platform with your buyers you are able to send your invoices directly to your buyers. Just by this action of automated increased visibility, your buyer is able to offer you several options for you to work better together. Your buyer can propose a Dynamic Discounting opportunity where for a very small reduction, say 1 or 2% you can be paid immediately. Or alternatively there is an opportunity for all your invoices to be paid on approval by default, again for a very small percentage administration fee via a third party processor like MasterCard. And finally, should you not wish to benefit from a buyer lead incentive, then there is always the opportunity to directly finance a 100% of your invoice through a company like Clear Funding. This new solution provides turnkey funding without contracts and administration fees, and is tied directly to the business network, so the ability to finance individual invoices as cash flow requires can be done in just a couple of clicks.

 So if we take a final step back and look how SMB’s suffer from late payments, then aside from the missing cash, it is the supply chain relationships both inside the company and with buyers that suffer most. It is the lack of visibility as to payment status and payment date means growth and scalability is severely compromised, and this is where most SMB’s should look in order to release the cash trapped in the supply chain. Without supply chain visibility there can be no absolutes.