One of the biggest problems that businesses face today is poor payment practices where their customers fail to make payment on time. This has a very large impact on businesses especially SMEs who face the problem of having a limited cash flow. Late payments problem has resulted in businesses facing severe consequences and sometimes, causing them to shut down their business. However, invoice finance can help you overcome the problems of receiving late payments.
Here are some of the ways that late payments can affect your business.
1. Unable to take on new projects/new sales due to insufficient working capital
When businesses are not paid on time, this would limit the business’s cash flow and thus, hinder the businesses growth. The insufficient cash flow will cause the business to not be able to take on new projects, fill large orders and invest in new equipment as they are fearful of overextending their financial exposure. Thus, this causes the business to lose its competitive edge. The amount of time and money wasted chasing their customers for payment will also hinder the business’s growth.
2. Impacting your cash flow may result in inability to meet operation expenses
The limited cash flow has a larger impact on small businesses such as SMEs as their cash flow is generally weaker than those of larger, more established businesses. The shortage of cash flow would cause businesses to be unable to pay for their operating expenses and thus, this would inhibit their ability to run their operations smoothly. They may even need to take up loans to cover such expenses.
3. Unable to pay your suppliers on time, which will impact your future relationship between them
Due to the limited cash flow that the businesses have because of the late payments received from their customers, they in turn, are also unable to pay their suppliers on time. This will cause commercial relationships to suffer as suppliers won’t be happy having to chase your business for payment. Suppliers are more unwilling to do business with companies that takes a long time to pay their invoices and they will not hesitate to cut ties with businesses that make late payments. Therefore, this may cause your business to have bad relationships with your suppliers or in some cases, even lose future working opportunities with the supplier.
4. Unable to meet your creditor demand, which will result in bad credit rating and impact capability in obtaining future credit facility
Late payment received from a business’s customers will also affect its credit rating.
The lack of available cash flow for the business, when customers do not pay on time, may cause them to have insufficient cash to pay off their loans or credit card bills. Late payments on credit card bills or loans will cause a company’s credit rating to drop as credit bureaus take into account late payments when evaluating your credit score. With a lower credit scoring, it would be more difficult and more expensive to obtain credit facilities in the future.
5. Worst, may result in shutting down the company
The effects of late payments can even lead to the shutting down of the company. When a company does not receive payment on time, this has a negative impact on cash flow and this would lead to severe effects such as the inability to pay its suppliers, insufficient working capital to run its day to day operations and the inability to pay its operating expenses. Moreover, some of these cases are so severe that companies, who are unable to carefully manage their limited cash flows, are forced to close their business.
Therefore, it is crucial for businesses to manage its collection process, ensuring on-time payments from the customers.
To help you ease the limited cash flow that your business may be facing, invoice finance is the solution that can help businesses unlock outstanding invoices and turn them into immediate working capital to support operational needs. This is a faster method to obtain funds as compared to applying for a cash credit from the bank as it would take a while before your credit is approved. However, for invoice finance, you can obtain funds within 24 hours after you have submitted all the required documents. Invoice finance would allow your business to free up cash tied down in your account receivables quickly and use the immediate funds to continue to run your business smoothly.
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