Late payments. Companies of all sizes must deal with them.
It is very common for customer invoices to be paid 30 to 90 days after the commonly accepted net-30 ─ which can seriously and detrimentally affect a business’ cash flow. The fact is that cash reserves can be quickly drained when payments are late. Making loan payments and meeting payroll still need to happen. Delayed payments create a domino effect ─ causing severe backups down the supply chain.
Big Doesn’t Always Mean Better
While it may seem counter-intuitive, big customers are more apt than smaller ones to endanger the financial stability of suppliers. Why? Because big companies often owe more and use intimidation tactics to exert control over their suppliers. They often pay late simply because they can. As a result, those same suppliers offer them zero interest short-term loans. And even though the value of outstanding accounts receivable is higher when interest charges are applied to late payments, it typically doesn’t make up for the financial turmoil long-term payment delays can produce.
This practice is commonly seen with large automobile manufacturers and big-box retailers that can easily afford to delay paying their smaller suppliers because they represent such a small amount of their supply. However, their major suppliers are not usually on the receiving end of late payments because those large corporations’ very own existence relies heavily on having a supply chain that is stable and dependable.
When large companies and their largest suppliers coordinate their financial obligations to the detriment of smaller suppliers, it becomes challenging for the credit bureaus to call out those businesses. This is because substantial transactions obscure the tremendous amount of smaller, lower-value payments that these large companies decide to delay. In essence, the reality of the situation is camouflaged by the perpetual late-payer receiving a high credit score which they really don‘t deserve. Prospective new suppliers are then given false confidence that their invoices will be paid in a timely manner, when in fact the opposite is more likely.
Strategies for Managing Slow-Paying Customers
Luckily, small and medium-sized businesses have several tools and strategies at their disposal which can help mitigate risk and better manage customers that are slow to pay:
- Diversification — A business should never have more than half of its sales dependent on one customer — or even a few customers within one industry. With a diversified customer portfolio, you can easily make changes should an account frequently delay their payments.
- Predictive Insights — If you know ahead of time which customers are probably going to become persistent late payers, you can anticipate the cash flow issues that will eventually occur and prepare for them by securing short-term loans and/or increasing your cash reserves so you can cover expenses until those payments are made.
- On-Time Payment Incentives — Another effective strategy is to offer an incentive to your large customers to pay promptly. Even though they may reduce your net profits, these losses can offset the costs you incur when payments are constantly late. Alternatively, you might consider building these discounts into your pricing structure at the outset.
- Status Alerts — Late payments are usually the result of an unforeseen issue or event. If you are alerted when a customer experiences a sudden problem that might affect their ability to pay on a timely basis, you can prepare for the reduction in income.
Effective Late-Payment Solutions
There are also several tools that small and medium-sized businesses can use to identify and manage late paying customers. They include:
- Portfolio Scoring Programs — Companies can quickly assess risk and minimize slow-pay and write-offs, while using score segmentation to increase efficiency. Hundreds of variables can be accessed, resulting in a score that provides an exceptional view of a company’s customers and prospects.
- Account Monitoring — These programs offer instant alerts whenever there is an event that may cause a customer’s financial stability to become questionable, such as bankruptcy, a lien, or a major credit score change. You can also receive an alert when a credit score improves significantly.
- Financial Assessments — Businesses can also obtain detailed data about how a company is paying its bills and other suppliers as well as its overall financial status. Suppliers can even find businesses that match the profiles of their best paying customers across a broad number of industries.
Companies of all types, no matter what their size, are increasingly having to deal with late payments. However, you can successfully guard your business from the financial chaos late payments can create by deploying the right strategies and using the right tools. If you manage this issue more effectively, your business will be more stable and profitable in the long term.