Payment times are an important, yet often overlooked, component of trade credit terms. Small- to medium-sized enterprises (SMEs) must protect themselves from the potential consequences of consistent late payments from customers, according to trade credit insurance provider, Atradius.
Mark Hoppe, managing director, Atradius, said, “Late payments impact cash flow, which can reduce a business’s ability to remain operational. SMEs need to be aware of when payments are due as well as when they are likely to be received so they can manage cash flow and reduce the risk of insolvency.”
The Australian Small Business and Family Enterprises Ombudsman (ASBFEO), Kate Carnell, is currently investigating SME payment times, with initial results finding that one in four organisations experience late payments of 31 to 60 days. Businesses are extending credit terms to greater than 30 days, which means late payments are increasing. Further, 60 per cent of SMEs stated that they believed they experienced a rise in late payments over the previous 12 months. (1)
Mark Hoppe said, “While there are a number of factors that can cause cash flow issues for organisations, one of the primary reasons is late-payment by customers, including other businesses. Steady cash flow is essential to keep businesses operating. An interrupted cash flow may place unforeseen pressure on the organisation and prevent it from paying staff or purchasing stock and the business may collapse as a result.”
Atradius recommends five key ways for SMEs to manage cash flow more effectively:
1. Know your customers
It may seem simple, but businesses must ensure the organisations they are doing business with have a solid credit history, can make payments on time and are trustworthy. Businesses may need to reassess the terms of trade if a customer’s credit rating worsens.
2. Don’t accept late payments
Late payments are a primary culprit of cash flow problems so it’s essential for businesses to know when payments are due and be prepared to chase up late payments. SMEs are particularly vulnerable to cash flow issues stemming from late payments. Their businesses are often cost-intensive, with stock, premises, labour costs and other overhead payments all depending on regular cash flow.
3. Issue invoices promptly
Issuing invoices promptly goes hand in hand with chasing up late payments; a business has no credibility in demanding payment on time if it can’t issue invoices in a timely fashion. It’s crucial to not let this administrative task slip down the list of priorities. Businesses should issue invoices at the first possible opportunity with a clear pay-by date.
4. Increase lines of credit
Increasing lines of credit with lenders or suppliers can be a quick and easy way of keeping cash flow healthy but only if the organisation’s underlying finances make it safe to do so. If a business’s finances don’t support extending credit, it can expose the organisation to greater potential risk, so this measure should be used sparingly.
5. Protect your business
Businesses can also protect themselves from late payments with trade agreements, contracts and trade credit insurance. Trade credit insurance protects the company against risks that could send the business into a financial tailspin, including covering the shortfall when customers pay late or not at all.
Mark Hoppe said, “Trade credit insurance reduces the company’s exposure to risk and the cost of uncollected expenses. It protects cash flow by ensuring accounts receivable are covered and allows SMEs to innovate, stay ahead of their competition and remain viable in an uncertain market.”
References: (1) Australian Small Business and Family Enterprises Ombudsman (ASBFEO) - http://asbfeo.gov.au/sites/default/files/ASBFEO_Issues_Paper.pdf