The domino effect of late payments on small businesses

The impact of late payments on small businesses can be catastrophic. At the very least they stall growth, and in the worst case scenario, set businesses on a path of financial decline that can end in insolvency.

Worryingly, one late payment can disrupt multiple businesses. GoCardless highlights the dangers of a dramatic ‘domino effect’ that can occur following a single late payment.

They surveyed 500 UK business decision makers and 86% agreed that one late payment affects an entire supply chain. The research also revealed 97% of respondents believed all businesses should receive timely payment, and that 20% would pay their own suppliers first if they themselves were paid on time.

So the will to change the current situation may be there, which is good news for local economies, particularly as smaller businesses continue to struggle with the negative economic effects of coronavirus, explains Jon Munnery of UK Liquidators.

Chapter 1

What is the domino effect of late payments?

Small businesses typically operate within a supply chain of regular suppliers and customers. Sometimes supply chains can be lengthy and involve multiple other businesses, all of which become exposed to the domino effect if one of them doesn’t receive payment on time.

The problem is that, unlike large businesses, SMEs don’t typically have the working capital available to manage the time difference between paying the required expenditure to complete a job, and receiving payment when it’s done.

Therefore, when a business isn’t paid, it compromises their cash flow. They often can’t afford to pay their own suppliers and company debt, which creates this ‘ripple effect’ through the supply chain.

There are also adverse effects of late payment that are less tangible, but that increase operational challenges for small business owners nevertheless.

Chapter 1

How else does late payment affect small businesses?

Time and resources

Chasing late payments can be a considerable administrative burden for small businesses. It takes time and money to consistently recover debt, and takes the focus off running the business. Essentially, it’s a distraction, but a dangerous distraction that can jeopardise the business’ future.
Reduced working capital availability

When there’s insufficient cash coming into the business, investment and growth plans are compromised, as the available cash must be used for day-to-day necessities. Business owners must make sure that bills can be paid, otherwise the business falls into insolvency.
No money to increase salaries

Late payments can prevent planned investment in staff, and lead to low morale and reduced productivity. Staff bonuses and salary increases may stall, leading to retention issues and further recruitment costs for the business if employees decide to move on.

Chapter 1

So what action can small businesses take in this situation?

Pass the cost of late payments on to their customers via price increases.
Delay their plans for growth or investment.
Stall any planned salary increases.
Implement new or improved debt collection/credit control procedures.
Offer discounts to encourage on-time payments.
Renegotiate their debts or enter into a formal debt procedure if the situation worsens.

Chapter 1

What would encourage on-time payments?

Offering a discount can encourage timely payment, but using an effective system of invoicing and chasing payments is also a good option - sending out reminder invoices and statements on a regular basis, for example.

Using invoicing software automates this type of communication and helps to reliably collect in debt. Remembering to invoice as soon as work is complete is also an important factor, as the work is then fresh in the customer’s mind.

Enabling electronic payment can help in this respect. It makes it easy for customers to pay – an important consideration that’s sometimes overlooked when tackling chronic late payment.

Chapter 1

The domino effect of late payment can be the end for some small businesses

There’s a very fine line between staying afloat and entering insolvency for businesses that regularly receive payments late. Business groups, including the Federation of Small Businesses (FSB), have been trying to rebalance the payment system for years, to improve the situation for smaller business in particular.

There’s no avoiding the fragility of many local economies post-pandemic, though. Whilst some businesses have been able to improve their financial position following the extreme challenge of coronavirus, it may still only take a single late payment to enter an irreversible decline.

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Credit & Risk

The domino effect of late payments on small businesses

What is the domino effect of late payments?

How else does late payment affect small businesses?

So what action can small businesses take in this situation?

What would encourage on-time payments?

The domino effect of late payment can be the end for some small businesses

Need help recovering an unpaid invoice?

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