Why Late Payments are an SME’s worst nightmare

The Market Invoice presentation on late payment brought back into focus the traditional scourge of the SME. Whilst I think that invoice finance and factoring are definitely not the way to finance a business struggling with late payment, the presentation certainly made interesting viewing.

I thought I would add a few points to prove just how damaging late payment can be for SMEs, but first it is worth stressing that a term loan from an alternative finance provider with a light touch approach is the best solution for an SME suffering with late payment from their debtors. A term loan through an alternative finance provider can help SMEs facilitate finance quickly, without hassle and with tailored solutions. The banks’ turnaround time often takes one year plus; through AltFi borrowers can receive the funds within a couple of months. As the banks increasingly funnel more business to AltFi providers, the industry is slowly gaining the respect it deserves. However, this should not extend to invoice financing. It is the crack cocaine of finance, incredibly difficult to shirk and once the cycle is entrenched an SME will find it very hard to escape from.

Back to late payment…

Small and medium-sized enterprises (SMEs) were owed £26.8bn as of July according to Bacs. In attempting to recover this debt, these businesses are spending £10.8bn a year. This downward spiral causes many SMEs to go into panic mode, fuelled by the fear of losing reputation and offending customers when chasing payment. And as approximately 99% of businesses nationwide fall into the category of SMEs, this is a major drag on the economy.

According to a Zurich poll one in five SMEs reported that they are owed more than £25,000, one in 10 more than £100,00 and more than 43,000 SMEs are owed more than £1 million. The affect for an SME? Expansion in terms of cash flow and hiring staff is inhibited and most importantly up to 130 hours of valuable time is wasted per year chasing invoices which could be used effectively elsewhere.

Existing legislation is supposed to provide SMEs with assistance; late payments can be recouped according to the Late Payment of Commercial Debts Act (1998). From an outside perspective this may seem like the answer to an SME’s problems; however 58% of SMEs say that they will not claim compensation for any late payment even though they are legally entitled to this. Once again the fears of the losing business and ruining relationships far outweigh the immediate compensation in terms of cash. The solution? Everybody pay on time – fat chance. The tonic to sooth the pain can come in the form of alternative finance providers such as peer-to-peer lenders who understand the needs of SMEs and can provide practical solutions to real problems.

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