Tax & admin 8 October 2015

Invoice finance only treats the symptom of late invoice payment, not the disease

ABFA suggests that funding alternatives – particularly invoice financing – are the answer to the late payment problem, but invoice financing in reality only addresses the symptom, not the disease of late invoice payment itself
ABFA suggests that funding alternatives – particularly invoice financing – are the answer to the late payment problem, but invoice financing in reality only addresses the symptom, not the disease of late invoice payment itself

Ormsby Street’s Martin Campbell discusses why it’s a British thing for businesses to be reticent about chasing for payment, and why funding alternatives aren’t necessarily the answers to late payment woes.

The Asset Based Finance Association (ABFA) recently released data that showed just how big an issue late invoice payment is for UK small businesses. There is an estimated £67bn in unpaid invoices, an astonishing total that is up eight per cent from £62.5bn twelve months ago. The study also showed that small businesses are now waiting an average of 72 days for payment of invoices.

This is clearly unacceptable. Such late payment has a significant impact on cash flow which in turn impacts a small business’ ability to grow and potentially, even survive. ABFA suggests that funding alternatives – particularly invoice financing – are the answer to this problem, but invoice financing in reality only addresses the symptom, not the disease of late invoice payment itself. Small businesses really need to take control of this situation themselves.

Outside help is unlikely to work

Invoice financing has got fairer. It used to be that a small business would have to finance its whole book of invoices, which meant that they ended up paying a premium because some invoices do get paid on time. But even allowing for that, invoice finance is still unfair and does nothing to tackle the issue of late payment itself.

Earlier this year, George Osborne announced plans for late invoice payers to be named and shamed on an official government website. From April 2016, any employer with more than 250 staff will be required to disclose their payment terms, how quickly they pay invoices, the proportion paid beyond agreed terms and any interest owed on overdue bills.

This is laudable, but in reality is unlikely to have very little tangible impact on whether businesses pay their invoices on time. For small businesses looking to protect themselves against late invoice payment, here are three tips to follow.

Campbell feels invoice finance is still unfair and does nothing to tackle the issue of late payment itself
Campbell feels invoice finance is still unfair and does nothing to tackle the issue of late payment itself

(1) Learn about who you are trading with

By far the most effective way to protect against late payment is to have an understanding of the financial health and credit history of everyone that you work with. Most small business do not think to credit-check their customers, believing it to be an onerous, expensive and time consuming process. It is not.

Basic information checking can be done via Companies House, or there are free or inexpensive tools that can provide valuable payment performance information available as well. Using these gives a strong indication of a company’s ability and likelihood to pay invoices on time and is a true asset in dealing with late invoice payment, allowing a small business to address problems before they even occur. Knowledge is power, and knowing whether a company has a history of late payment will give you a strong indication if it is the type of company that you wish to trade with.

It’s also worth getting the opinion of other small businesses that have traded with your prospective customer. If they have run into problems due to late payment, then you might want to think long and hard about the impact late payment will have on your business. If you can’t take that risk, then never be afraid to ask for payment up front, or even walk away from the deal if you have to. Expanding with a new customer who delays payment isn’t really expanding at all, it’s just another headache.

(2) Be clever about the invoicing process

We work with 25,000 small businesses in the UK and even more in Europe and it always surprises me how lax some small businesses are with the timing of their invoices. If you are late submitting an invoice it gives an impression that you aren’t too fussed about being paid on time.

So if you have started working with a company and weren’t able to credit-check them beforehand, a small business can help itself by ensuring that invoices are received into your customers systems at exactly the right moment. Date your invoices correctly, but post them a couple of days before they become due, ensuring they are with the accounts department on or before month-end, taking away the opportunity for someone to claim they didn’t receive the invoice until later.

(3) Never be shy about chasing for payment

If you are saddled with a customer that is slow to pay invoices, then you need to get over any shyness about chasing for payment. I think it is partly a cultural thing but British businesses are reticent about this, people are fearful that doing so will somehow jeopardise their relationship with the customer. That is very unlikely, and there is no reason why you should not chase for payment until you get it. It’s not something that we’re entirely comfortable with, but automate the process and you’ll soon find that it becomes just another admin task that gets done. Outstanding invoices represent money that you have earned and are entitled to be paid for, so I’d advise requesting payment until you get it.

Image: Shutterstock

Martin Campbell is the MD and co-founder of Ormsby Street, the company behind CreditHQ, an online tool used by small businesses to check the financial health of the businesses they trade with.

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