If there’s one thing businesses from all industries seem to have in common, it’s the need to chase late payments long after they are due. While this issue affects all sectors, its impact on small and medium-sized businesses (SMBs) is especially worrying.
Many businesses have come to view late payments as a necessary evil or simply the cost of doing business. But should this be the case when so many small businesses are starved for cash?
To examine the impact and prevalence of late payments, Melio partnered with YouGov to poll 1,002 American SMBs. We were surprised to find that while 79% of those surveyed believed businesses must stick to agreed-upon payment terms, 59% said they experience late payments.
This gap shows that even though most businesses agree late payments shouldn’t happen, many still turn to them as an easy fix. Before we dive into the reasons for late payments, let’s examine their impact on small and medium-sized businesses.
What’s the harm in late payments?
Since it’s a practice so many businesses opt for, it might seem as if late payments are no big deal. However, 44% of the SMBs we questioned said late payments are a challenge that negatively affects their business.
The damages include delaying new hires (40%), postponing the purchase of inventory (39%), and cutting employee hours (36%).
What getting paid on time would mean
It’s hardly surprising that most small businesses surveyed (63%) agreed their business would benefit greatly from getting paid on time.
Timely payments would allow them to invest in business growth (64%), pay back loans (58%), or increase hiring (52%), contributing to the overall health of SMBs, which remain the backbone of the U.S. economy.
Why late payments endure
While paying late is clearly a flawed solution, many businesses, especially smaller ones, still hang on to it as a lifesaver. To better understand this phenomenon and what can be done about it, we’ll need to examine the two main contributors to late payments: cash flow issues and outdated payment infrastructure.
Cash flow issues
Maintaining a healthy cash flow—in other words, making sure more cash comes into your business than goes out—is a delicate dance. Delaying payments may feel like a magical solution as it helps many businesses, small and large alike, stay afloat.
While this may be true in the short run, when businesses are paid late, their cash flow situation often leaves them with no choice but to delay payments to their own vendors. Thus, a continuous cycle of late payments is created, with cash flow issues being both the cause and the result.
The payment infrastructure
Payment infrastructure refers to the acceptable ways businesses pay each other. Unlike consumer transactions, which rely heavily on credit card payments and cash—paper checks are still a dominant business-to-business (B2B) payment method. In fact, as of 2019, checks still accounted for 42% of all B2B transactions.
This is puzzling, especially considering that checks are also a slow and very manual form of payment. You need to write checks, cut them, stuff them in envelopes, and send them out in the mail, which means days (or even weeks) of waiting to get paid.
With such a tedious process, it comes as no surprise that businesses have built delayed payment terms into their standard workflows, with due dates set for long after the original invoice date. These soon grew to the standard of net 30 or even net 60 and net 90, in some cases.
Still, despite these generous extensions, one in four businesses surveyed said they often wait 20-30 additional days past the due date before actually receiving payment. So, is it time to reconsider payment terms?
The times they are a-changin’
The good news is that payment infrastructure is beginning to change. In fact, the use of checks among businesses has been in constant decline since the 1990s. This is also evident in data previously collected by Melio.
This decline can be explained by the rise of smart digital payment tools, which allow businesses to better address the causes of late payments and perhaps avoid them altogether. These tools offer easier, safer, and faster payment delivery choices, like bank or ACH transfers, so businesses no longer need to hear the dreaded words “the check is in the mail.”
Going digital also helps improve cash flow by:
- Keeping businesses on top of their finances with better tracking options
- Letting businesses schedule payments in advance
- Supporting more payment options, like credit cards, which allow putting payments off until the next billing cycle
Time for a rethink
New technologies provide us with an opportunity to pause and rethink old habits. In the case of business payments, perhaps it’s time to start pushing in a better direction. Businesses across the nation should rethink their payment habits and strive for a framework to benefit their own health, as well as the resilience of the entire business ecosystem.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.