Colin Walls: SMEs must stand up to late payments

With the British summer upon us and the nation beginning to wind down for the holidays, one thing that businesses don't want to slow down is payment of invoices.

Colin Walls, head of trade and working capital at Bank of Scotland. Picture: Contributed

SMEs struggle with slow or delayed payments all year round and, in the worst case, slow or late payments can drive an enterprise into bankruptcy.

The scale of the problem cannot be overstated – SMEs are owed nearly £500 billion in outstanding invoices, while a third of businesses cite late payments as their biggest cause of cashflow problems, according to Bank of Scotland Commercial Banking’s most recent Business in Britain report.

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It’s no different to your employer not delivering your salary on time. If you’re saving for a summer trip and your pay packet is delayed indefinitely, then your plans are set back if not shelved entirely.

Equally, any business that has staff to pay needs to know it has the cashflow to do that. Not being paid on time by a customer can therefore be debilitating.

The issue is particularly acute during the summer because finance departments across the country can find themselves short-staffed due to holiday leave. More than usual, businesses will experience delays.

If there’s a time to face up to the late payments challenge, it’s now.

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So what do business owners need to do? The basics are a good place to start. Contact your clients before the agreed due date to ensure they have received the invoice, check that everything is in order and that they expect to be making payment on time. Being familiar with your clients’ payment processes, while using the right purchase order numbers in all correspondence will put you in good stead. A customer may look for any excuse to delay a payment so the best advice is not to give them any.

Cashflow forecasting is another must. Being on top of what money is coming in and what is going out will enable you to spot a late payment as soon as it occurs. Being able to promptly chase up a delayed invoice, there and then, is better than noticing it too late.

Yet even with the world’s smoothest accounting procedures, a late payment can often be unavoidable. For ambitious businesses that do not want to be held back by arbitrary cashflow difficulties, or want the flexibility to deal with any short term spikes in late payments, lending options such as invoice finance can provide that cashflow boost.

Invoice finance gives you up to 85 per cent of your invoice value prior to payment from your customer. This way, dormant cash on your balance sheet is unlocked and any late payments are effectively “cashed in”.

More businesses are finding it to be an effective way to navigate the cashflow minefield. The latest research released by industry body the Asset Based Finance Association shows that invoice finance is more popular than it has ever been, with even the number of medium to larger businesses – those with annual turnovers of more than £50 million – using it jumping by 25 per cent in the past year a year.

As the spectre of late payments looms at this time of year, financial diligence and options such as invoice finance can ensure that SMEs enjoy summer, just like the rest of us.

• Colin Walls is head of trade and working capital at Bank of Scotland