Apr 05, 2019

Study Reveals How Late Payments Affect Small Business

When two businesses agree to work together, the business that is owed money will typically send an invoice to the payer once the products have been delivered or the service has been rendered. How long the payer has to send the money is dependent on the contract the two businesses signed at the beginning of the process.

An enlightening study by Plum, a consulting firm, revealed that 11% of all invoices sent out by small businesses aren’t paid on time. Add up all those late payments, and you’d get a total of more than $1 trillion a year – roughly the GDP of Indonesia.

That’s not the worst of it. Plum’s researchers also found that 7.5% of all small business invoices ultimately have to be written off as bad debt.

What impact do these late payments have on small businesses? A kindergartner could probably tell you the results aren’t positive, but Plum surveyed more than 3,000 companies in 11 countries to dig deeper into the scale of the problem and the issues it causes for businesses.

First, when a small business doesn’t get paid money it is owed, it’s more vulnerable to disruption than a larger company with a substantial cash reserve. The most serious area of concern is cash flow. Because when money is tight, a business struggles to stay alive.

The authors of the study refer to the impacts as a “domino effect.” If you don’t get paid on time, you’re forced to track down the debtor and compel them to fork out the cash. This process can be extremely time-consuming, with American small businesses losing an average of 15 workdays each year trying to collect late payments.

Of course, not all businesses decide to go on the payment hunt. When asked why they don’t pursue late payers, companies reported the following barriers (in order of most common):

  • Protecting relationships with clients
  • No dedicated resource to chase late payments
  • Staff don’t have time
  • Lack of staff members
  • Not knowing which invoices are due

Whether a business goes on the payment hunt or not, the negative impacts of late payments cascade down. A small business weighed down by late payments will often struggle to carry out regular business. And the resulting financial strain means fewer pay reviews, reduced payroll, and smaller bonuses for employees, which further diminishes morale and productivity.

Small businesses with cash flow struggles are also less likely to make future investments in the business. Additionally, they’ll struggle to pay their obligations to other companies. When the issues are widespread, it can cause an entire sector to stall or even shrink. The results can then affect the broader economy.

All told, 40% of businesses reported distinct ways late payments have dinged their business. The 2 most common impacts cited were the inability to invest in their company and difficulty in paying their suppliers. Both of these issues are sure-fire ways to inhibit a business’s ability to succeed.

So why are so many payments late? We know they’re sometimes the result of the payer lacking the funds necessary due to their struggles with other payers not delivering funds on time. The survey asked respondents for the most common excuses they hear from payees to give more context to the scourge of late payments. They could choose from the following options:

  • Didn’t receive the invoice
  • Invoice payment is pending
  • Disputing invoice amounts
  • Wanting to pay invoices in particular periods of the year
  • No reason was given
  • Invoices were not paid late
  • Other

For 8 of the 11 countries in the survey, including the United States, the most common reason given was “no reason.” This statistic is surprising because it implies that delinquent companies typically aren’t struggling with legitimate challenges. Rather, they forgot to make the payment or chose to ignore it.

According to the authors of the study, this response “suggests that there should be no particular reason why invoices should be paid late, and so companies should generally be amenable with a mandate of punctual payment.”

If your business sees a large number of late payments, don’t give up and write them off as bad debt. Pursue the payment and establish your reputation as a business that takes contracts seriously. Doing so will help you collect much of what’s due to you, while also minimizing future issues.

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About the author

Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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