Credit control part 1 - Late payments and invoice finance

POSTED: 12th August 2014
IN: Guides

For small and medium-sized enterprises (SMEs) that are heavily reliant on a consistent and predictable cash flow, late payments can be a major headache.


Recent studies have suggested that this is a serious problem for smaller firms, and one that has increased in severity in recent years.

Many businesses will have first-hand experience of late payments, so what can you do to reduce your exposure to this risk?

The extent of the problem

There is a strong body of evidence indicating that late payments are a genuine problem for SMEs, which often find themselves at an unfair disadvantage to their larger, better-resourced counterparts.

A report released by the Asset Based Finance Association (ABFA) in July 2014 revealed that small firms have to wait an average of 23 days longer for payment than large corporations.

Over the last year, companies with turnovers of less than £1 million have typically waited 71 days for invoices to be honoured by clients, according to the research. Businesses taking over £500 million a year, in comparison, were paid after 48 days on average.

The ABFA said the problem was exacerbated by the credit crunch and recession, with SMEs seeing an increasing number of their bigger customers using their power to gradually lengthen payment terms. As a result, many small firms have struggled to pay wages, keep up with tax bills and invest in growing their operations.

Research from the payment service BACS has also suggested that late payments are proving more onerous for smaller companies than larger corporations. The problem has created a total cost of £46.1 billion for all organisations, with SMEs (employing up to 250 people) shouldering 85 per cent (£39.4 billion) of this burden, according to the findings.

The report revealed that 60 per cent of smaller businesses are experiencing late payments, with the average firm waiting on £38,186 in unpaid invoices. A quarter of respondents said they would be at risk of bankruptcy if the outstanding amount passed the £50,000 mark.

Mike Hutchinson, a spokesman for Bacs, said: "Despite the positive signs emerging about the financial state of the nation as a whole and the fact that we are thankfully moving out of recession, SMEs, which everyone agrees are the drivers of a successful economy, are being held back because of the increasing pressures of late payments."

The invoice finance solution

For companies searching for a solution to this problem, one option that could prove particularly useful is invoice financing.

Invoice finance allows you to bring in a third party to 'buy' your unpaid client bills for a fee. There are two main types of invoice finance - factoring and discounting.

Factoring usually involves an invoice financier - who can be independent or part of a bank or financial institution - managing your sales ledger and collecting money owed by your customers. They will buy the debt owed to you and make a percentage of the sum available to you upfront, before collecting the full amount from your client. Once the invoice has been fully paid, the financier will forward the remaining balance to you and charge interest or a set fee for the service.

Invoice discounting is slightly different in that the financer will not manage your sales ledger or collect debts on your behalf, but will lend you money against unpaid invoices for a fee. When your customers pay up, the money goes to the financier, reducing the amount you owe and allowing you to borrow more on invoices from new sales.

There are advantages to both approaches, such as the extra time users of invoice factoring get to focus on other parts of their business when the financier takes control of their sales ledger.

One of the benefits of discounting is that it can be arranged confidentially, so your client doesn't know you are borrowing against their invoices. It also makes it easier to maintain close customer relationships.

Any business thinking of going down this route should also take into account the costs involved, as well as the possibility that clients might prefer to deal with you directly, rather than with a financier.

Members of the ABFA provide an average of £17.5 billion in invoice finance to British companies at any one time, which marks an increase of 29 per cent since the peak of the recession in 2009-10. Invoice finance is currently used by over 20,000 small firms in the UK.

Jeff Longhurst, chief executive of the ABFA, said it is "more important than ever" that businesses are aware of ways to get around the "roadblock of late payment".

He added: "Invoice finance helps businesses to improve their cash flow, and is an effective way to unlock the value of one of a business' biggest assets - its unpaid invoices."

See next month's credit control article for further tips and information.


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