If you're running a small business, chances are you're waiting for at least some of your invoices to be paid. According to a recent study, 64 percent of SMBs are affected by late payments that put their financial stability at risk.
But why is this such a huge problem and how can SMBs protect themselves? We asked Tim Chaves, serial entrepreneur and founder of ZipBooks — which provides free accounting software for small businesses, consultants and freelancers — for his thoughts.
Why is late payment one of the major financial issues hindering SMB growth?
More often than not, growth comes from bigger contracts with bigger companies. What do all big companies demand? Better terms.
If you are a SMB that has been trucking along with smaller customers that are OK with “payment upon receipt” terms, it can be quite a shock to wait 60 to 90 days to get paid. SMBs have usually had to invest in things like additional infrastructure and more headcount just at the time when income gets pushed further out. It's not a great combination.
What makes SMBs so vulnerable to late payments?
The timing of payment is about the balance of power between payer and payee. If you have two parties that are on equal standing, you are going to have fewer problems with late payments. Small businesses and contractors are going to have to deal with late payments much more often bigger companies because the payer knows that a contractor has little recourse other than to wait.
Small businesses and contractors are spending all their time providing services to their customers and have little time to pursue collections or legal recourse. They also have a high cost to replace existing customers, so they would rather suffer late payments than do something that is going to alienate their existing customer base.
What safeguards can SMBs build into their accounting or invoicing systems to get paid on time?
There may be a carrot that you can put out there to encourage payment in a more timely fashion. For example, if your client has been with you for a while and they just started making late payments, it may be a passive signal that they are unsatisfied with your service in some way. If times are tight, there might be something that you can work out. Just knowing that late payments aren't going to persist forever can be a boost in morale.
Strictly enforcing late fees can be a good stick when trying to bring delinquent customers inline. Most small businesses don't.
There are plenty of financial instruments available to SMBs to help smooth out cash flow, and they are getting better all the time. Invoice financing is one example that traditionally has only been available to larger companies. Better underwriting, automation and lower software development costs are making short-term lending based on accounts receivable more accessible than ever.
How will implementing these fixes benefit businesses?
Late payments lead to higher stress and a lower quality of life for everyone involved. Whether you are the principal who has fewer sleepless nights, or an employee who no longer worries if her company is going to make payroll, fixing systemic accounts receivable issues is going to just leave you feeling less like an abused cog in a larger economic machine.
Timely payments means lower costs for the customer and higher profit margins for the business. Feeling confident that you have a process in place that gets you paid on time also means that you can grow your business with confidence.
Any final advice?
If you're having real trouble collecting from a client, talk to them to figure out the reason. All too often, we presume to know the motivations of other parties without actually picking up the phone. If you're actively reaching out to to build and maintain your customer relationships, you'll be able to get to the root of nearly any problem — and grow your business successfully.
Sharon Hurley Hall is a professional freelance writer and blogger. Her career has spanned more than 20 years, including stints as a journalist, academic writer, university lecturer and ghost writer. Connect with Sharon on her website and Twitter.