The headache of long payment terms is well documented, as is the dismal reality facing successful businesses with cash flow droughts. Indeed, the primary reason that small businesses fail is that they don’t have enough cash to pay suppliers, employees and utility providers.
It’s easy to stick your head in the sand but, when the very survival of your business is at stake, it’s time to take action. Fortunately, there are some good practices that your business can adopt in-house to help streamline the payment process, and get you the cash you’re owed, faster.
Look at your cash flow mechanisms
The first thing to do is, of course, keep track of your customers and figure out who really are your ‘best customers’. Do some analysis on which ones are the most profitable and which ones pay promptly. These may not be the customers who you enjoy doing business with the most, but they are the ones that will keep you afloat. Then make sure you invoice them promptly and understand any special invoicing procedures your customer might insist on – as well as the standard HMRC requirements for invoices.
Then, once you have the basics covered, it’s time to ensure you’re making the most of the money you have. Are your financing arrangements suitable? Can you stagger payments on large assets, or to your own suppliers? Are your financing arrangements cost-effective, or do you run up large balances on business credit cards at certain times of year, for example? There are plenty of alternatives that can help you manage cash flow.
Sell your invoices
Sometimes the best way to solve a cash flow problem is to find a form of finance that keeps you in control of money coming in and going out. Overdrafts can help give you some leeway, but perhaps not the peace of mind you’re after.
A simple and straightforward solution involves online invoice financing. Businesses that provide goods or services to other businesses can use their invoices as collateral for a loan that will tide them over until the invoice has been paid (30 or 60 or even 90 days later). Up to 90% of the money can even be advanced within 24 hours. Then, once your client pays the invoice, invoice finance providers can give you the remainder – less a small fee.
This solution offers flexibility, as you can submit as many or as few invoices as you want. And, as debt is offset directly against known incoming payments, it’s a solution that can give you peace of mind at times when cash is short, or when you want to make investments that will grow the business sooner rather than later.
Build in incentives for early or prompt payers
If your best attempts to negotiate shorter payment terms with your customers have come to nothing, one idea that has become increasingly common practice amongst smaller businesses is to offer a ‘good behaviour’ discount. If you offer a percentage discount off the bill for punctual payments, you’re likely to save time waiting for payment and make the books look healthier.
You could even consider adding a separate tier for early payments. A reward of 5% discount if a customer pays within ten days may seem like a large chunk of your revenue, but if your margins allow it, it can also be a shrewd way to do business. After all, the sale is fairly useless to you until the money’s in the bank.
Run a tight ship with your collections process
You don’t want to be in a position where your customers or suppliers aren’t paying you because you haven’t invoiced them. If this is the case, it’s time to take a long, hard look in the mirror.
If your invoicing system is chaotic, it can be seen as an open invitation for your customers’ payment to be sloppier too – and it makes it much harder for you to protest when they put you in a difficult position. Regardless of how small your business is, it’s worth putting one person in charge of this area. Invoicing is a time-consuming process, but it’s also essential to your livelihood and someone needs to be on top of it at all times.
Invoicing aids like Chaser.io also help here – they’ll link to your accounting software and generate invoices and reminder ‘chasers’ automatically.
Make use of R&D tax credits (if you’re eligible)
If you’re already investing a significant amount of time and effort into research and development (R&D,) there’s a chance you will qualify for R&D tax credits. As a small or medium-sized business, you might be applicable for an additional 130% tax deduction for qualifying expenses, which can significantly lower your corporation tax liability. To find out whether you qualify, take a look at HMRC’s guidance on R&D tax relief.
The best part is that you don’t actually have to be making a profit to qualify. Loss-making businesses are eligible too. In fact, you may be able to receive a tax credit from the government that is equal to about a third of what you spend on research and development.
By implementing some – or all – of these measures, your business should be able to grow, free from the worries of late payment and poor cash flow.
Utilize short-term funding lines
Despite your best attempts, it's highly likely that you will still encounter problems with late payments, and this will often negatively affect your cash flow. If this is the case, and other efforts to chase payment have been unsuccessful, there is another option: a short-term funding facility. These are tailored to businesses that have a temporary cash flow gap and are a good option for those who need a quick cash injection without having to repay over a long period of time.
There are a number of different lenders offering flexible short-term funding facilities, enabling you to borrow up to £500,000 over a term of anywhere between one month and five years. Some of these lenders will even give you the option to repay the loan early, without penalty, giving you the freedom to chase payment without worrying about your cash flow.
About the author
Laura Beatrix Green manages content and creative projects at MarketInvoice, the London-based fintech company that helps businesses grow by unlocking money in their unpaid invoices.