In Canada, small and medium size enterprises (SMEs) are owed millions of dollars in unpaid money, and many have actually lost track of exactly how much they are owed.
As many as 89% of Canadian businesses are experiencing late payment by their customers, and nearly half of all invoices are paid past the due date.
Larger corporations often stretch out payment terms, which can mean weeks, months, or even longer before their suppliers get paid. If you are a small or medium size company, waiting to get paid can make it hard to cover costs and keep your business moving.
When your cash flow is tied up in outstanding invoices for the goods and services you’ve already provided, it can affect your business and its growth: You may incur late payment fees and endanger contracts if you are unable to pay your suppliers on time. You may not be able to take advantage of discounts by paying your vendors and contractors early. You may even encounter challenges paying your employees on time. Even when your employees are the most productive, when you’re exceeding sales targets, late customer payments can have a negative impact on your business.
HOW CAN YOU PROTECT YOUR BUSINESS FROM THE DAMAGING EFFECTS OF LATE PAYMENTS?
Offer Prompt Payment Incentives
Although this may not work for every business model, payment incentives can sometimes encourage customers to pay more quickly. You could offer an early payment incentive, giving customers a discount on their invoices if they pay promptly or if they pay within a few days of receiving an invoice. However you structure payment incentives, make sure it works for your business instead of just becoming an additional discount for those customers who pay on time anyway.
Charge Interest on Late Payments
All business owners know what happens when you charge interest on late payments; it’s essentially like a loan to your customers that you are still no closer to collecting on. By negotiating these terms in advance, you can dis-incentivize your customers from paying late to avoid the additional fees or charges. Late fees can help offset the negative impact to your cash flow, but it doesn’t resolve the immediate challenge you’ll have in finding the money to tie you over until the customer finally pays. As a business claiming interest and pursuing clients for late payments, puts you in an uncomfortable position that does more damage than good to your client relationship, which could result in less business or fewer orders over time.
Get a Line of Credit from a Bank
Even though you’re waiting for your customers to pay, business doesn’t stop. You need to keep moving and keep your employees working and you need cash to do it. A line of credit from a traditional financial institution like your bank, which comes with interest on the funds and sometimes an annual fee, can provide the needed emergency cash to keep your business funded in uneasy times. However, securing a line of credit from a bank can be difficult and time consuming (or even impossible) for new businesses. If you don’t already have strong cash flow, solid assets, and a great credit score, banks typically deny credit to businesses that don’t meet a low-risk profit position.
Transform Your Accounts Receivables into Assets
Factoring, sometimes called “accounts receivable financing,” is a viable alternative option for dealing with late payments and keeping your cash flow as healthy as possible. With factoring, you get paid right away for your invoices by your financial services company, which then collects payment from your clients.
Factoring is a powerful funding solution for new and growing companies, or for those companies experiencing seasonal demand, as the amount of funding grows and adapts with sales. Moreover, funding is based on the accounts receivable of the company making it a debt-fee financing option.
- Factoring allows you to focus on running your business, not on chasing payments
- Factoring allows you to prepare for upcoming demand and deliver on promises
- Factoring offers funding that easily adapts to your business needs
How factoring works in three steps
- Invoice your customer and send a copy of the invoice to your funding provider
- Receive funding up to your agreed advance rate
- Your funding provider manages the administration of your accounts receivable and after customer payment you receive the remainder of the invoice value
Companies like Bibby Financial help businesses across Canada and around the world to unlock the working capital they require to meet their needs, whether to fund cash flow gaps, purchase new equipment, fund growth and expansion, or to refinance. With factoring, you’ll have more control and focus on running your business.
Getting paid—on time, all the time—will provide the capital your business needs to negotiate discounts with your suppliers, and allow you to take on larger orders as you are able to source and pay for the materials you require. And with the right funder like Bibby Financial, you can get the capital you need, when you need it.