Payment terms are hurting my cashflow, what can I do?
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Winning a new contract and securing work for your growing business is a fantastic moment and a reason to celebrate, but one potential hazard is agreeing payment terms that will work for you. Offering extended payment terms can often help to win a deal – a company which offers 90 days’ credit can be an advantage among competitors for a lucrative contract.
The reality is that most of us don’t want to potentially upset a new client before we’ve even got off the starting blocks of working together, but unless your payment terms are aligned there is the potential for conflict ahead.
Conversely, working with suppliers on tightened payment terms can increase pressure to bridge the gap between purchasing materials or paying staff to fulfil an order, and receiving payment. In recent times, many suppliers have reduced their terms, and companies which are able to make prompt or immediate payment may be able to negotiate a discount of 10-15 per cent on the cost of materials in exchange for cash on delivery.
By thinking about your payment terms on invoices and to suppliers you work regularly with, you may be able to improve your business’ cashflow. Having this aspect of your company’s finances organised creates stability which can improve your credit score and increase your ability to secure commercial finance if your business needs to access a business loan.
What is the average payment term?
There is a wide variety of payment terms for small businesses which can range from 7-60 days, with 30 days being a commonly used credit period. However, many small businesses are often found waiting for payment up to 90 days after invoicing a client. If a job required an outlay for materials or labour, the lag effect on a business could potentially be up to six months or more between starting work on a project and receiving payment – there are few businesses which have such deep reserves to sustain themselves and their staff without a regular flow of funds.
How has COVID-19 affected payment to small businesses?
A report in June 2020 by the Federation of Small Businesses (FSB), Late Again: How the Coronavirus Pandemic is Impacting Payment Terms for Small Firms, revealed that COVID-19 has had a significant effect on companies’ ability to trade.
Of 5,471 firms surveyed, 62 per cent experienced an increase in late payments from customers (44 per cent) and/or had payments frozen completely (30 per cent) as a result of COVID-19. Additionally 10 per cent experienced an increase in payment terms from customers as a result of COVID-19. Upon publication of the study, the FSB reported UK late payments as totalling £23.4bn, an increase of 80 per cent.
With many sectors, including retail, hospitality, travel and health, under increased pressure from COVID-19, the effects of Brexit on international trading and a squeeze on the labour market, the reality is that cashflow is under greater pressure than ever before, which could prove debilitating for many small and mid-sized companies. Commercial funding can provide a solution to ease the pain of late payment or reduced payment terms by suppliers – invoice discounting and merchant cash advances are just two types of finance which enable a business to receive a percentage of cash ahead of receiving payment.
Why don’t I use a loan or overdraft facility to overcome late payment?
Every business needs accessible cash to operate – from paying staff and bills, to ensuing funds are available to pay taxes, keeping a reasonable reserve will protect your firm from unnecessary pressures.
Good cashflow will also help to build and protect your credit rating which in turn will impact your ability to access further commercial funding should you need it to grow. Relying on an overdraft with your bank could be problematic if the facility is reduced or withdrawn with little notice. Additionally, an overdraft can be restrictive as it doesn’t move in line with your business’ cashflow while a business loan is a fixed type of lending which doesn’t flex alongside peaks and troughs of income.
By contrast, cashflow finance products such as invoice discounting and merchant cash advances create stability for a business as they release cash against invoices or payments, in return for a percentage of the value of projected income. Lenders will require that debtors adhere strictly to your payment terms to provide this type of facility, and so it is important to ensure that all parties are in agreement before signing up to an invoice discounting agreement. It’s important to undertake credit checks prior to working with a company, have a robust in-house system to chase payments and consider debtor insurance to underwrite any major contracts.
Cashflow finance has evolved hugely in recent years and rather than the once ‘all-or-nothing’ option that put some firms off in the past, it’s now possible to use a single, a few or as many invoices as required to raise finance, or to access an advance on card payments based on average monthly income. With fees starting from as little as 1 per cent of an invoice value or 2 per cent of monthly transactions, it can be a highly effective way to mitigate long payment terms and manage regular costs.
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