Almost 40% of businesses in the UK spend four or more hours a week dealing with late payments. That adds up to 208 hours, or just under nine full working days per year wasted simply chasing money your company has already earned.
Late payments cost UK businesses almost nine working days per year
Time wasted on late payments is also not an issue limited to the UK. In the US, the situation is arguably worse, with the average mid-sized business spending up to 14 hours per week on late payments, amounting to over 700 hours yearly.
These stark statistics underline the actual knock-on cost of dealing with late payments. It's not just the financial impact of slow invoicing but also the time and effort needed to follow up on unpaid or overdue bills.
The actual monetary cost of late payments should not be underestimated. Research by Chaser shows that 87% of businesses are typically paid late. Around 60% of those report being paid 15 or more days late.
The late payment crisis has resulted in the average business being owed £38,000 in late payments. To put the strain that this outstanding debt puts on companies into context, 25% of they would be facing bankruptcy.
Around 7% are already in that position.
Data collected by Bacs reports that the total cost of chasing payments adds up to a colossal £2.16 billion. To add even more pressure, statistics from the same report show that 12% of businesses are forced to employ at least one staff member specifically to chase late payments.
The emotional cost of late payments
Not only does the constant strain of late payments directly cost businesses in terms of lost productivity and person-hours, but it can also lead to a heightened sense of stress for those managing finances day-to-day.
The bleed-over effect of late payments can have a massive and destructive impact on the owners of small businesses. Nearly a quarter of business owners say they are unable to go on holiday because of the pressure of late payments. In addition, nearly half say that the stress caused by late payments has impacted their personal relationships.
When the money they rely on to survive and reinvest in their business is not forthcoming promptly, owners can be unable to pay their own or staff and, as a result, may be forced to restructure their financing or even close down altogether.
The burden of late payments doesn't just stretch to the bank balance either; it can also take its toll on mental health. Overdue payments can lead to mental health issues such as stress, anxiety, and depression for business owners who are constantly worried about how they will cover their bills or payroll.
The stress of dealing with late payments is further compounded by the fact that it's likely to take up a large portion of an owner’s personal and professional time each day. They have to constantly chase payments, call clients and attempt to negotiate payment terms, all while trying to keep their business going.
The impact of late payments on businesses
Now that you have a better idea of the sheer scale of the late payment crisis and the amount of time, both personal and professional, that it takes up for business owners, let's take a look at how that lost time and money affects businesses.
Delayed revenue
The first and most obvious impact of late payments is that many businesses will have their cash flow disrupted and delayed when invoices remain unpaid.
This means that businesses don't have access to the cash flow they need to pay their own bills, invest in growing their business or hire the skilled staff they need. Late payments also lead to a knock-on effect where those businesses who are being paid late cannot pay their own suppliers on time. This leads to a cycle of late payments, which can be hard for businesses to break out of.
To deal with these issues, many businesses are forced to rely on forms of credit to bridge the gap in their cash flow, such as taking out a loan, using a business credit card, or invoice financing. This can be expensive and often difficult to manage and impacts a company's credit rating - making it harder for them to access the funds they need in the future.
Increased administrative costs
As mentioned, the hours spent chasing payments, reconciling accounts, and dealing with the effects of late payments can be time-consuming. This means that businesses have to spend more money on administrative costs to manage the added complexity.
Managing late payments can require additional resources, such as increased staffing to handle accounts receivable. This extra work can take up valuable time and effort that would be better spent on other, more productive activities such as customer service, product development, or business growth.
The costs of late payments can also include the fees associated with using third-party services such as collection agencies or debt-recovery firms. These services can be expensive and have the potential to damage an organization’s reputation if you choose the wrong supplier. By choosing a trusted collections agency that puts your customer relationships first, however, you can recover late payments without damaging your reputation.
Damaged business relationships
For most businesses, building and maintaining good relationships with customers and suppliers is essential to their success. Repeat business and referrals can contribute significantly to the success of a company.
The stress of constantly chasing late payments can lead to strained relationships between companies and their customers, reducing the likelihood of repeat business. In some cases, payment disputes may even lead to legal action which can be expensive and damaging to both parties.
The impact of late payments on individuals
As already discussed, the late payment crisis has a material impact on individuals as well as the businesses they own. These small business owners and entrepreneurs are often faced with a range of difficult decisions, impacting them both financially and emotionally.
Personal financial strain
Truncated cash flow and late payments can cause a strain on an individual’s personal funds. Many small business owners live paycheck to paycheck when starting up, so even a short delay in payment could disrupt their budget and cause hardship.
Resorting to credit card debt, loans, or other options to make ends meet can add further stress and become a complex cycle to break.
Reduced credit score
Using a credit card or invoice financing to keep the business running can quickly reduce a person’s credit score. This could make it challenging to qualify for loans or other services in the future and may result in higher interest rates when borrowing money.
Increased stress and anxiety
Around 75% of UK business owners report that late payments have impacted their sleep and stress levels. Business owners can struggle to make ends meet and have to deal with the added pressure of chasing invoices and managing their company’s finances, which significantly increases the stress and anxiety associated with running a business.
Strategies to prevent late payments
The good news is that there are steps you can take to minimize the risk of late payments. Here are a few strategies you can use:
- Clear payment terms and policies - Setting clear payment terms and policies from the start helps to ensure that clients know what is expected of them. Getting your customers to agree to a contract outlining clear payment terms and expectations can help prevent misunderstandings that could lead to late payments. It can also help to settle any dispute in a timely manner.
- Automated invoicing and payment systems - Automating your billing and invoicing processes can help to streamline the payment process and make it more efficient. Automated invoicing and payment systems reduce the cost associated with invoicing and payment processing and significantly reduce the time and staffing cost of chasing late payments.
- Timely communication with customers - Regular follow-ups with customers ensure that payments are made on time. If payments have not been received, contact your customers as soon as possible to remind them of their payment obligations and help resolve any issues they may be experiencing. Pre-invoice notifications are a great way to keep customers informed of upcoming payments and thank you emails after payments have been made will help to ensure customer loyalty. These can be sent as both email payment reminders and SMS payment reminders.
- Offering incentives and penalties - Early payment incentives can encourage customers to stay ahead of their payment obligations, while late payment penalties can help to ensure that payments are made in a timely manner. These incentives and penalties should be clearly outlined on invoices and statements and communicated with your customers as part of your payment terms.
These simple steps can ensure that late payments are chased in a proactive and timely manner and with a reduced cost in time and money.
Reducing the time cost of late payments
The reality is that the time and resource cost of late payment is putting many small and mid-sized businesses on the edge of insolvency, and the mental health of business leaders’ at risk. Taking a proactive stance on chasing late payments and making use of adaptive strategies, new technology, and automation can be a lifeline to businesses.
While there are ways of mitigating the financial situation, no one should have to spend time chasing late payments instead of focusing on growing their business, and it’s important that finance leaders do their utmost to prioritize receiving timely payments from customers.
