The impact of late payments on businesses

Unfortunately, many business owners are far too familiar with late invoices and how many problems they can cause. If you’re lucky enough to not have faced this burden, late invoices (also known as overdue invoices) are when customers, business partners, or any third party don’t pay an invoice on time. Late invoices are a huge inconvenience but around half of businesses have experienced late payments in the last year.

We wanted to look deeper into late invoices and their impact on businesses to try and help other SMBs avoid this issue. To do so, we surveyed 2,008 small-medium business owners asking them a range of questions regarding late payments - here is what we found…

73% of businesses are negatively impacted by late invoices

According to our survey, over 70% of SMBs have been negatively impacted by extended payment terms or late payments in the last year — 62% have been somewhat negatively affected, whilst 11% have been significantly negatively affected. 

The research also found that around 40% of SMBs agreed that if late payments continued, businesses could be forced to close in the next year. Late invoices can impact many areas of a business, including its cash flow, growth and employment. 

Interestingly, our survey revealed that 52% of SMB owners have been more affected by late payments this year than in previous years. This change could be due to the cost of living crisis also causing cash flow difficulties. 

• pay an invoice on time to another small business (11%);

• reinvest money into the business itself (11%);

• pay suppliers (10%);

• pay rent or bills (7%).

Other ways that late payments affect businesses

These are some of the most detrimental effects that late payments can have on businesses.

Time spent chasing invoices

Financial officers often spend large chunks of their time chasing overdue invoices. The time spent doing this could be spent elsewhere, and recovering debt usually comes with costs of its own.

Impact on cash flow & capital

Late payments can have a direct impact on the amount of cash available to the business at any given time. This loss in cash flow and working capital will likely cause issues in every aspect of the business.

Less freedom to reinvest in the business

With less cash available, the business has less money available to reinvest in itself. This means less money for new staff, up-to-date training, facilities, equipment, marketing and more. Cuts to these things will have their own adverse effects and will make the business less able to function as normal.

Impact on salaries

Salaries and promotions can also be affected by late payments. With less money on hand, companies are less likely to increase pay for their workers. This can affect morale, increase staff turnover and ultimately affect productivity.

Potential for business to close

Ultimately, if a business is not able to be paid on time, this can lead to bankruptcy and the closure of the business. While a company may theoretically be owed money, this does not matter if they have no money in the bank. 

Which businesses experience late payments the most?

Our survey revealed that the region that experienced the most late payments in the past year was Yorkshire and the Humber, with 56% of SMBs in this region saying they have experienced late payments in the last year.. This region was also more negatively affected by late payments when compared to previous years. The West Midlands (53%) and South East (52%) regions followed Yorkshire and the Humber.

Bigger businesses seem to experience the most late payments - those that have a turnover of £100 million with 50 to 250 employees that are ten years old revealed they have experienced late payments the most. The manufacturing industry also seems to be the industry which has experienced the most late payments in the past year, according to our survey.

Businesses spend up to ten hours a week chasing late invoices

According to our survey, just under 10% of SMB owners spend five to 10 hours a week chasing late invoices, 20% spend one to four hours, and 27% spend less than an hour. Despite an hour a week not sounding like a tonne of time, it’s equivalent to 260 hours in a working year and 12.5% of a business's yearly working hours.

This time could certainly be spent on more effective things that could help grow and support a business, such as improving employee skills. According to research, companies spent around 62.4 hours training staff in 2022, so if time wasn’t spent chasing late invoices, businesses could train four staff members a year.

Alternatively, this time could be put into other aspects of a business, such as marketing. Studies show that just 20 hours a week spent on marketing can have a significant increase in revenue. These hours could also be spent on bookkeeping to save time when it comes to completing tasks such as a self-assessment form.

Shockingly, our survey revealed that over 40 SMBs spend more than 24 hours chasing late payments, with the legal industry spending the most time, possibly due to chasing payments from clients, which could take more time to try to get hold of in some cases than companies. Also, 52% of SMBs state that 10-39% of invoices currently with customers/suppliers are overdue.

SMBs are currently owed an average of £27,214 in late payments

When asking respondents how much they are currently owed in late payments, 28% revealed they are owed up to £9,999, 14% are owed between £10,000 and £49,999 and 11% are owed between £50,000 and £100,000. 

The average amount owed in late payments is almost enough to hire a new member of staff — the average median salary in the UK is £27,756. Shockingly, 80 SMB owners stated that they even had to consider firing staff before due to money owed from late payments. 

Around 7% of SMBs are owed more than £100,000 in late payments — 11% of those from the Yorkshire and the Humber were waiting on the same staggering amount. The transportation and distribution industry and businesses over ten years old with 50 to 250 employees also tended to be owed the most in late payments.

When comparing this survey to our previous one, the average amount SMBs are owed has increased by 27.4% since September 2021.

How can businesses prevent late invoices?

There are a few ways you can try to manage and prevent late payments including:

Late payment fees

A late payment fee is when a business charges an additional fee on top of an overdue invoice from a business, supplier or third party. These charges tend to happen if the payment has not been made before the payment terms. Our survey revealed that 46% of SMBs have 15 to 30 days as their payment terms, and 15% say their payments are usually paid 15 to 30 days late. 

The late payment fees could either be a fixed sum for the cost of covering the late payment, or you could opt for charging an interest. According to HMRC, 8% interest should reduce the number of late invoices on their books and 21% feel they have a stronger cash flow and have improved relationships with their customers.

Financial management software

Whilst it is difficult to completely avoid late payments, there are ways to prevent them and stay in control. Using financial management software to automatically send invoices and chase late payments will save SMBs time and money. 

QuickBooks invoicing software creates professional-looking invoices quickly, allowing businesses to apply discounts, charge late fees, and perform tax calculations for VAT liability and Income Tax. Our easy-to-use online invoicing software is the perfect way to spend less time chasing payments for your small business.

Overall, it's very clear from our survey results that many SMBs have experienced and been negatively affected by late payments, resulting in lost money and time that could have been used to improve businesses if payments were received on time. 

Save your business both time and money and get 3 months free on our online invoicing software now!