Overcoming the potentially-deadly impact of late payments

Payment times are an important, yet often overlooked, component of trade credit terms. Businesses must protect themselves from the potential consequences of consistent late payments from customers, writes Martin Jones.

Late payments impact cashflow, which can reduce a business’s ability to remain operational. SMEs need to be aware of when payments are due as well as when they are likely to be received so they can manage cashflow and reduce the risk of insolvency.

This year the Australian Small Business and Family Enterprises Ombudsman (ASBFEO) investigated SME payment times, with results finding that one in four organisations experience late payments of 31 to 60 days. Businesses are extending credit terms to greater than 30 days, which means late payments are increasing. Further, 60 percent of SMEs stated that they believed they experienced a rise in late payments over the previous 12 months. 
New Zealand companies tend to pay faster¹ than their Australian counterparts, according to Dun & Bradstreet, at an average of just less than 35 days². 

While there are a number of factors that can cause cashflow issues for organisations, one of the primary reasons is late payment by customers, including other businesses. Steady cashflow is essential to keep businesses operating. An interrupted cashflow may place unforeseen pressure on the organisation and prevent it from paying staff or purchasing stock and the business may collapse as a result.

Atradius recommends five key ways for SMEs to manage cashflow more effectively:

1. Know the customers

It may seem simple, but businesses must ensure the organisations they are doing business with have a solid credit history, can make payments on time and are trustworthy. Businesses may need to reassess the terms of trade if a customer’s credit rating worsens.

2. Don’t accept late payments

Late payments are a primary culprit of cash flow problems so it’s essential for businesses to know when payments are due and be prepared to chase up late payments. SMEs are particularly vulnerable to cashflow issues stemming from late payments. Their businesses are often cost-intensive, with stock, premises, labour costs, and other overhead payments all depending on regular cashflow. 

3. Issue invoices promptly

Issuing invoices promptly goes hand in hand with chasing up late payments; a business has no credibility in demanding payment on time if it can’t issue invoices in a timely fashion. It’s crucial to not let this administrative task slip down the list of priorities. Businesses should issue invoices at the first possible opportunity with a clear pay-by date.

4. Increase lines of credit

Increasing lines of credit with lenders or suppliers can be a quick and easy way of keeping cashflow healthy but only if the organisation’s underlying finances make it safe to do so. If a business’s finances don’t support extending credit, it can expose the organisation to greater potential risk, so this measure should be used sparingly.

5. Protect your business

Businesses can also protect themselves from late payments with trade agreements, contracts, and trade credit insurance. Trade credit insurance protects the company against risks that could send the business into a financial tailspin, including covering the shortfall when customers pay late or not at all. 

Trade credit insurance reduces the company’s exposure to risk and the cost of uncollected expenses. It protects cash flow by ensuring accounts receivable are covered and allows SMEs to innovate, stay ahead of their competition and remain viable in an uncertain market.

Martin Jones is country manager, New Zealand, for trade credit insurance provider Atradius.

References: 
(1) Australian Small Business and Family Enterprises Ombudsman (ASBFEO) – http://asbfeo.gov.au/sites/default/files/ASBFEO_Issues_Paper.pdf   
(2) http://dnb.co.nz/_media/documents/NZ%20Trade%20Payments%20Analysis%20Report%20-%20Q3%202016.pdf