According to new figures, the problem of late payments straining SMEs finances is getting worse; being owed a total of £67.4bn in unpaid invoices, that’s up 8 per cent from this time last year (1). Between Q2 2014 and Q2 2015, the percentage of SMEs waiting more than 30 days for payments has increased from 42 to 51 per cent (2). Companies in the construction sector were hit the hardest with 55 per cent waiting more than 30 days to be paid, up 11 per cent from the previous year. 23 per cent of SMEs surveyed by Tungsten said late payments have put them at risk of closure with under a quarter (22 per cent) stating most late payments were from large companies (3).
You know how you’re affected when your customers pay you late, it can throw your financial plan off course, leave you with an unpredictable cash flow and unable to pay your own suppliers. But what’s the effect when you pay your suppliers late? How does this affect your company and its credit score?
Damage your reputation
With the ever- increasing problem of late payments, companies are being more vigilant and strict on who they do business with. The ease that new companies can be set up and the rate and amount of new start-ups that are entering the market makes due diligence a priority. Word of mouth travels fast in each industry therefore if you pay your suppliers late, it won’t be long before other suppliers in your industry could start hearing about this. If this happens on a regular basis, it may be the case that they’d rather lose you as a business partner rather than have you disrupt their cash flow and company.
Red flags for your finances
If you often fail to pay suppliers on time, you should start questioning why. You may be able to negotiate payment terms once or twice but after this you need to find the root of the problem. Not being able to pay your suppliers on time could be a sign that there’s something going wrong with your finances that you need to pay attention to. Is it that you’re not meeting revenue targets? Do your payment terms with your suppliers and customers not balance? Or is it a case of inefficiency in the accounts department? Inability to meet payments needs to be dealt with before it escalates into a bigger problem.
Get you into debt
It’s very tempting to start taking short term loans out when your customers haven’t paid you yet but it’s time for you to pay your suppliers. This can seem like a good idea as it’ll keep you on the good side of your suppliers and not risk damaging your reliability and trustworthiness. But the situation is a double edged sword; you take out the loan because your customers haven’t paid you but then wait for them to pay you back before you can pay back the loan. It can become a vicious cycle rather than a solution to an underlying problem. Should the answer be to actually monitor your customers and be alerted as to when they’re unable to pay? This is where CRAs such as Experian Business Express can help to not only check but monitor your customers. Also keep some reserve funds for unexpected grey days so anyone paying you late won’t affect your cash flow. Depending on your contract with your supplier, they could start charging you interest once you go over the agreed payment terms.
Damage your company credit score
Paying your bills late could potentially affect your credit score as it partially takes into account payment behaviour. Your score could be affected if your customers pay you late on a regular basis as this increases your chances of problematic cash flow which ultimately affects your credit score. You run the risk of being issued a CCJ if you take too long to pay your bills which is likely to show up as an adversity on your credit report. In addition, this will show up in your payment performance data where it’ll show how many days beyond terms it took you to pay your bills and how this compares to the industry average.