Supply chain 9 January 2018

How to get paid on time – The million dollar question for small suppliers

late payment culture
Up to 15 per cent of small business turnover could now be tied up in late invoice payments

As research continues to highlight the extent of the late payment problem in Britain’s supply chains, Henning Holter, head of global business development at Tungsten Network Finance, outlines six strategies to help small suppliers get paid on time.

Late payment is the Achilles’ heel of small business. Typically being towards the end of the supply chain and without the luxury of deep cash flow reserves, these firms are often hardest hit.

According to Bacs, small UK businesses are owed around £14.2bn in overdue payments. This is a staggering figure – though it is a dramatic drop compared to five years ago when the total was £30.2bn.

Almost a third of companies face delays of at least a month beyond their terms and nearly 20 per cent wait more than 60 days before being paid. One of the reasons behind the slow payment problem is the trend towards larger companies insisting on 90-day payment terms.

It is such a big problem in fact, that the government is now stepping in. Last April, the Department for Business, Energy & Industrial Strategy (BEIS) introduced half-yearly reporting cycles on the payment policies, practices and performance of large businesses with the explicit hope of reducing late payment to small suppliers. By the end of November 2017, the first wave of companies submitted their data to the government.

While this “name and shame” approach shouldn’t be necessary, it is a reality that late payment affects thousands of small business owners and no matter how much is written about the knock-on effect to other businesses, companies still end up delaying payment.

So why do companies pay their suppliers late? Historically, most people suspected that managing cash flow was the cause of late payment and that companies wanted to hold on to their cash for as long as possible.

Some sixty four per cent of the businesses we spoke to in our Friction Index study blamed slow internal processes; 39 per cent blamed lack of automation; 27 per cent administrative errors; 20 per cent team capacity to manage the volume and only 16 per cent referred to managing cash flow.

While it is perhaps surprising that so many businesses cited clunky internal processes and slow paper-based systems as the predominant causes of late payment, it is also encouraging because these things are surmountable.

Technology is readily available that can streamline and speed up the payment process and entirely eradicate administrative errors and the bottlenecks that outdated, paper-based systems tend to generate.

So what can small suppliers do to encourage their customers to pay on time?

  1. Identify sources of friction within the payment process

Ask probing questions. Is it always the same customers who are slow to pay? Is it particular times of year or people who are challenging to get hold of? What can you do to smooth the process?

  1. Evaluate risk

Carry out credit checks on customers before getting into business with them and consider credit insurance so you are protected.

  1. Communicate

Work on developing a good relationship with suppliers and clients. If you are on good terms, you know who to go to in order to free a blocked invoice and get paid on time. Keep them informed of what your business plans are. Look for ways to stay in touch regularly.

  1. Agree terms upfront

Draw up a robust commercial contract or set of trading terms and conditions which everyone has seen and agreed upon before any goods or services are provided. Make sure you include key terms such as payment and penalties for late payments.

  1. Be prompt

Delayed invoice delivery means delayed payment. Therefore, invoicing clients as soon as the work is completed is a simple tactic to ensure that things run smoothly and on time.

  1. Finally, explore how new technology could transform the payment process for you

Automation and e-invoicing eliminates human error and can give you full visibility of your invoice status online. It means nothing gets lost in the post or on someone’s desk. You can send electronic invoices no matter what format your current invoices are in, and know for sure they’ve been received.

All invoices are digitally signed, encrypted, and stored online where you can access them anytime. Fintech platforms like ours have thousands of firms of all sizes transacting on their platform every day, using automated tools and simple interfaces to trade without friction.

Late payments impact economic growth and chasing for payment is a source of frustration for suppliers and buyers alike. So much time can get tied up in calls to customers which could otherwise be invested in building and growing a business.

While you may think it is costly to introduce automation to your business, it will in fact save you money in the long run as you will no longer spend hours chasing for payment and the clunky paper-based processes will be a thing of the past.

Over a third of small suppliers are expected to do business on uncontracted payment terms

Henning Holter is head of global business development at invoice finance provider Tungsten Network Finance

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