Mitigating the risk of late payments to SMEs.
When it comes to late payments to SMEs, invoice finance is a proven method of mitigating the risk and reducing the pressure. For larger companies, receiving late payments doesn’t tend to affect their business too dramatically. Whilst they do have higher outgoings, they also have higher amounts of invoices coming into the business. However, for small businesses receiving late payments can drastically change their financial landscape. “The government has unveiled new measures today to support small businesses and the self-employed by tackling the scourge of late payments, which according to the Smart Data Foundry is costing SMEs £22,000 a year on average and according to FSB research, leads to 50,000 business closures a year.”
Let’s create a typical business scenario:
A small London-based cleaning company with 12 full time employees. For simplicity, we will say that each team member is paid £25,500 per annum, making the monthly cost per employee £2,125.00. Cost per month for staffing is £25,500.00
The company holds 6 contracts with businesses to clean their offices daily. Meaning that there are x2 employees scheduled per contract. The company charges each contract £6,300 per month for their services, equalling a total of £37,800 to be invoiced.
Because of the nature of the business, the labour is supplied first, then at the end of the month invoices are sent out typically on a 30-day payment term. However, employees will receive their money at the end of the month. Meaning that the business could be waiting a further 30 days after paying their employees to receive their money – this is called the payment gap, and is a collective pain point for SMEs.
All being well, all 6 contracts pay on time, this would leave the business with £12,300 per month to pay over heads, supplies, and hopefully make a profit.
However, if just one contract doesn’t pay on time, this is reduced to £6,000. Even worse, if two contracts don’t pay on time… the amount becomes dangerously low at £300.
How can the company continue to pay staff on time whilst waiting to collect payment on their invoices? The later the payment is received, the bigger the impact it has on the company.
Should late payments become a pattern, they can negatively impact the businesses cash flow and working capital. Late payments not only effect the monetary side, but also, time. Time is a valuable resource for SMEs.
In dire cases, late payments can damage the businesses staff retention due to late wages, lead them to lose clients, and potentially enter insolvency.
A Solution to Late Payments
Within most our blogs and articles, we discuss how invoice finance can be utilised by SMEs as an alternative funding solution. Which is what we will be coming too shortly, but more specifically, we will be recreating the above scenario, but with an invoice finance provider working alongside the cleaning company. Please note, invoice finance benefits businesses across most sectors.
Before we carry on: through an invoice finance provider, the business receives an immediate cash injection upon selling its upcoming invoices. This facility has two services within it which we will focus on. Invoice discounting and recourse factoring.
Our small cleaning company partners with an invoice finance provider, who provide them with a payment of 80% of their upcoming invoices = £30,240.00
This action alone solves the payment gap problem we mentioned above. Instead of waiting the 30-day period to receive payment, the company has only waited 24-48 hours from uploading the invoice. Once the debtor pays their invoiced amount to the provider, the cleaning company will receive back the outstanding amount of monies owed minus the associated agreed fees.
If the cleaning company opted for invoice discounting, this is the full service that they would receive.
However, recourse factoring includes the additional service of 3rd party credit control management. How is this service carried out?
- The cleaning company invoices their debtors and notifies the provider of the sales transaction.
- The provider will then manage all aspects of the sales ledger, to the point where the debt is paid.
Because the provider is managing the sales ledger – the company gains back time (as a 3rd party will be undertaking the work) meaning time can be allocated into different areas of the business. As well, as the provider takes on the role of debt chasing, the risk of late payments are reduced. On some occasions there may need to be action from the company to resolve a payment dispute by the debtor.
Through invoice finance we have solved two pain points from our first scenario (payment gap and time). Now, for the main pain point – a solution to late payments to SMEs.
As the company has already received payment on their invoices upfront – this minimises the risks of late payments to SMEs affecting the business cash flow. Invoice finance builds momentum and creates a naturally positive cash flow, which in turn keeps the company building towards profitability.
Would you like to know more? Contact us.
