" class="no-js "lang="en-US"> Breaking the late payments cycle
Thursday, March 28, 2024

Breaking the late payments cycle

By Glen Foster, Managing Director UK and Northern Europe, Libeo

The late payments cycle

Late payments are a big problem most businesses are familiar with. Given the current economic environment and inflation crises, late payments have significantly impacted whether a business stays afloat.

An FSB study published in the Small Business Index (SBI) found that just last year, one in three business owners noted an increase in late payments of invoices. Moreover, one in ten business owners voiced their concerns regarding the threat late payments posed to the survival of their enterprise.

Several factors contribute to the rise of businesses facing crises today. In addition to an increase in late payments, high inflation rates and increased administration fees encapsulate a challenging environment for mitigating insolvency.

The impact of late payments on resilience and reputation

When business owners accrue late payments, they are confronted with additional costs on the late payment. As a result, a cycle emerges as late payments lead to even more costs business owners accumulate. With the Late Payments Cycle becoming more prevalent, interest costs, late payment fines, and reputational damage are vital concerns.

Interest and debt recovery costs are the greatest consequences of late payments. The cost of interest on late payments (Statutory Interest) within the UK is 8% of the owed amount plus the Bank of England base rate for business-to-business transactions. Unfortunately, this base rate has increased between the 31st of December 2021 and the 22nd of September 2022, increasing from 0.25% to 2.25%. This has a harmful effect that produces a toxic feedback loop whereby the rising interest makes it more difficult for businesses to pay the invoices. The subsequent delay results in more interest accruing, exacerbating the debt businesses fall into.

In addition to increasing interest rates, businesses must also pay penalties for late payments. A combination of interest rates, base rates, and penalties on late payments poses significant stress on businesses. These stressors subsequently reduce business revenue and strain their ability to survive.

The late payments cycle weakens trust between suppliers and buyers. More importantly, business reputations will be negatively impacted for those trapped under the late payments cycle– affecting their long-term presence in the industry and beyond.

Additionally, poor supplier relationships may obstruct the delivery of promised products and services. As a result, customers may not be satisfied with the changes to the goods and services they were advertised or were accustomed to and choose to move to a competitor.

Identifying the root causes of late payments

When combating late payments, we must identify the root causes of the payment process. The first cause could be the complexity of the payments approval process itself. For example, between a restaurant and the suppliers, some people who work within the restaurant and deal directly with the suppliers do not have access to the business’s finances and therefore are not able to pay the supplier. Managing approvals to streamline payments is key.

Late payments can result from relying too heavily on manual or multiple processes that can increase the number of obstacles in paying on time.  One of the ways businesses can ensure their suppliers are paid on time and mitigate a complex approval system is by harnessing digital accounting tools.

These tools allow business owners to schedule payments, alleviating the risk of accidentally missing a payment. Digital tools also allow businesses to employ a proactive approach by making payments in bulk, another defence line that prevents the late payments cycle. Open digital platforms with specific functions such as invoice collection, workflow approval, supplier/buyer management, and cash flow monitoring save businesses time when managing their finances and allow for visibility of all transactions. Consequently, these preventative and proactive measures made possible by digital accounting tools maintain quality supplier-buyer relationships– a win-win for all those involved.

Improving supplier relationships is crucial for business survival. Advantages such as preferential rates, premier access to new products, and exclusive or limited supplier offers are contingent on a good supplier/buyer relationship. Consistent quality deliveries for required goods and services also give businesses a competitive edge, an advantage that ultimately improves bottom-line profitability.

Undeniably, the late payments cycle threatens business viability. Fortunately, streamlining business finances through digital accounting tools can reduce late payments and allow businesses to stay compliant and resilient to changing business needs.

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