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The Cost of Late Payments for SMEs

by | Jul 28, 2022 | 0 comments

Late payments among SMEs in Australia are nothing new. According to a 2021 study, Australian businesses average about 11 days in late payment times. That’s on top of the 30-day payment terms which Australian businesses usually follow. Another report reveals that SMEs are losing up to $7 billion a year due to late payments.

Late payments directly impact cash flow and can even hamper day-to-day operation for small businesses, causing a loss of productivity and revenue. An earlier survey suggests that 90% of SME failure is because of poor cash flow.

The impact of late payments on SMEs

Small businesses already have low margins, high turnover, and frequent overlays. Locked-up capital caused by delayed payments can have dire consequences.

Beyond poor cash flow, there are other costs to consider when dealing with late payments. These costs might not be evident immediately, but they impact other areas of your business, making it even more crucial to get paid on time.

infographic showing cost of late b2b payments for SMEs

1. Poor cash flow

Millions of dollars are locked away from small businesses yearly only because of late payments. Poor cash flow is the primary reason why most SMEs close down in the first place.

Late payments restrict cash flow for small businesses, which means they cannot pay their supplier on time too. The suppliers are also small businesses, and this trend creates cash flow challenges throughout the economy. That is most probably about 71% of B2B business transactions happen through trade credit. With trade credit, businesses can buy goods and services without an upfront payment. But it also makes them a lender.

Related blog post: 10 Hacks to Accelerate your Cashflow

2. Locked up capital

You have zero or limited working capital when your money is locked up in accounts receivables due to late payments. Without liquid capital,  your ability to innovate, stay ahead of the competition and your potential for investment is stifled.

3. Additional admin costs

Manually chasing late payments is an inefficient use of employee time. Let’s also not forget other administrative costs such as collection calls, reminder letters, receivables emails, and more.

 

4. Recovering bad debt

Say a small business has a profit margin of 10%. If the business has $5,000 in unpaid debt, it must make $50,000 in sales to recover the debt. Even if the profit margins were higher, say at about 20%, the business would also need $25,000 in sales to recover the unpaid debt.

If you are only recouping your debt, you have not made any profit on that $25,000 or $50,000 in sales. It is challenging for a business to survive if there are no profits.

Related blog post: How an enhanced credit application process can protect your business from bad debts

5. Interest costs

Late payments may also increase the probability of SMEs taking a loan to keep their business running. And business loans come with interest – further adding strain to your expenses.

Related blog post: The Human Side of Accounts Receivables Automation

6. Opportunity Cost

Diverting resources to chase after late payments means you are losing out on opportunities that would otherwise grow your business.

For instance, you have had one of your employees chasing clients who are late on their payments. Say you pay your employee $20 an hour, which translates to $160 a day and about $3520 monthly. This is money that could’ve been invested to launch new product lines, or marketing and sales initiatives that can contribute to business growth.

7. Debt recovery costs

If you have aging accounts receivables – businesses who have not cleared their dues for several months – you may need to take action against them. Debt collection agency fees, lawyer’s fees and other legal expenses are additional costs you will incur just to recover money owed to you.

8. Credit risk policies

Many companies put policies and procedures in place to minimise the risk of late payments. You may want to run credit assessments on your customers or check their history to see how big of a credit risk they are through credit agencies. Businesses also implement programs such as incentives for early payments, credit insurance, etc. All these policies and procedures are ways of minimising late payments, but they do come with costs. In that case, your money on hiring third-party credit agencies could have been your profit.

Related blog post: Six Key Steps for SMEs to Manage Credit Risk

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Eliminate late payments with AR automation and digital payments

AR Automation

AR automation is an excellent way for businesses to eliminate repetitive and time-consuming tasks for your accounts receivable team. With AR automation software, you can automatically send invoices and reminders through email and SMS, increasing the chances of your customers paying them quickly.

The capability of AR automation to sync with your accounting software also help ensure data integrity. Many invoices are paid late because they do not contain the correct information, and this causes disputes and further delays. Having one source of truth for invoice data and providing transparency to that data is one of the biggest perks of AR automation software.

Digital Payments

Digital B2B payments can also help minimise late payments by enhancing your customer’s payment experience and encouraging them to pay on time. Accessibility to an online payment platform also helps reduce labour costs processing payments.

Credit cards are often the mode of choice in digital payments and come with processing fees. While this can be an additional cost for your business, the benefits of on-time payments far outweigh the cost. It’s also important to note that you have the option for customers to pay for these fees instead. You can also offer alternative payment methods to customers, such as direct debit payments. 

Credit Risk Management

Implementing a comprehensive credit management tool can help you gain credit insights about current and prospective customers. A cost-effective way to initiate credit checks is to leverage the credit score information from your AR automation software. This will give you the purchase and repayment history of your customers, whether there were any defaults and the frequency of on-time payment vs default. This way, you’ll be able to plan how to reduce your default rates and ensure you receive your payments and your working capital is optimized.

In Conclusion

Late payments can have serious consequences for small businesses, from insufficient working capital to the inability to pay your employees and suppliers. It is often the main reason for cash flow issues. 

Implementing AR automation and digital payments technology creates efficiencies around the AR collection process – providing tools that streamline invoice communication, minimise the risk of bad debts, and create convenience in paying you on time.

 Book a free demo of ezyCollect and discover how AR automation can help you get to zero days late payments.

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