Late payments are responsible for a quarter of all business failures. But even one late payment can cramp your cash flow. Legal measures to recoup the funds can create constraints on your time and resources. A late payment letter may not be sufficient. In this article, we discuss how to handle late payments and how to avoid them in the future.
Late payment definition
A late payment is an amount of money a borrower sends to a lender or service provider that arrives after the payment due date or a grace period for the payment has passed.
Late payments can stem from a wide array of causes: management problems, market conditions, or even unpaid invoices by one of their own customers. It’s also possible that the customer is holding back payment to dispute the order.
Mandated business lockdowns due to the Covid-19 crisis has spawned a severe, long-lasting rash of late payments. Government support has provided temporary liquidity which helped some companies. However, as these payments come to an end, the number of late payments is likely to remain elevated well beyond the anticipated economic rebound.
The impact of late payments on businesses
Severe problems with late payment preceded the Covid-19 crisis, as these examples from 2019 show:
In the UK, nearly 1 in 7 SMEs failed to pay wages on time due to cash flow problems according to Intuit Quickbooks.
In the US, nearly one third of small business owners said they wait more than 30 days for payments according to Forbes.
Whatever the reason, late payment of commercial debts can turn your trade receivables into bad debts, which amounts to a temporary or permanent loss of cash. That affects your financial projections and potentially those of other businesses in your ecosystem as well.
Late payments also cost your business time and money: writing late payment letters involves additional working hours, and covering the shortfall in income can necessitate a short-term loan or overdraft, for example.
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