The Impact of Late Payments: How Factoring Protects SMEs

Struggling with late payments? It’s a common problem for small and medium-sized enterprises (SMEs). But that doesn’t mean you have to accept it, especially when it has the potential to derail your operations and damage profitability. Below, we’ll explore why invoice factoring for SMEs late payments is becoming the go-to solution and how to start receiving payment for your business-to-business (B2B) receivables instantly.

Addressing Late Payments is Crucial to Managing Cash Flow in SMEs

Late payments are more than an inconvenience. They quietly diminish your business’s ability to function and grow. It’s one of the most significant cash flow challenges for SMEs today.

Nearly half of all B2B invoices are paid after the due date, according to Atradius. While the timing is significant on its own, around six percent of B2B invoices end up being written off as bad debt entirely.

These kinds of disruptions have a ripple effect, and small and mid-sized businesses feel it the hardest.

How Late Payments Impact Your Business

Recent findings from the Atradius report show just how far the ripple effect goes.

• Slowing Down Payments to Suppliers: In all, 35 percent of small businesses say late payments strain their ability to meet existing commitments. This can be damaging to relationships and impact the business’s credit score, resulting in loan denials and a higher cost to borrow down the line.
• Delay in Property, Plant, and Equipment Investment: Another 31 percent say they hold back on capital investments due to late payments. This can be damaging to profitability and stunt long-term growth.
• Delay Paying Bills and Staff: A further 28 percent said they postpone paying bills or employees. At the least, this can result in poor morale and high turnover. Legal consequences are also possible.
• Increased Borrowing and Short-Term Financing: One in four relies more heavily on expensive, short-term financing options.

Risk is Rising

While these concerns are enough to create a business case for taking action, it’s worth noting that nearly half of all businesses believe their customers face a growing risk of insolvency in the coming year. That puts your receivables, and your working capital, at even greater risk.

Late Payments Undermine Liquidity

Improving SME liquidity depends on steady, predictable cash flow. However, when customer payments become unpredictable, so does your ability to plan, invest, and pay your own bills.

How to Prevent Late Payments

While you cannot control when your customers decide to pay, you can put systems in place that make timely payments more likely. The goal is to set clear expectations, reinforce accountability, and reduce friction in the payment process. Let’s take a look at some tips that can be helpful in overcoming late invoice payments.

• Clear Payment Terms from the Start: Make sure your terms are easy to understand and outlined in writing before work begins. Specify due dates, accepted payment methods, and any late fees or penalties.
• Send Invoices Promptly and Accurately: Nearly 40 percent of invoices have errors, according to Ascend. This can result in rejections, ultimately causing payments to come in late. Automation can help you ensure accuracy while improving speed.
• Set Up a Reminder System: Automated email or text reminders a few days before and after the due date keep your invoice top of mind. This gentle nudge often prevents oversight from turning into a full delay.
• Build Strong Communication with Customers: Sometimes, late payments are the result of confusion or internal bottlenecks. Keeping the lines of communication open makes it easier to resolve issues quickly.

Solving Late Payments with Invoice Factoring for Small Businesses

Even when you do everything right, late payments can still pile up. Factoring services for SMEs can help in these situations by turning your unpaid invoices into working capital. Instead of waiting weeks or months for your customers to pay, you get instant access to the cash you’ve already earned.

How Factoring Works

Invoice factoring, also called accounts receivable factoring, is a simple concept. You sell your unpaid invoices to a third-party company, known as an invoice factoring company. In return, you receive most of the invoice amount upfront. The factoring company then collects payment from your customer directly.

Here’s a basic example:

• Invoice: You invoice your customer. In this example, let’s say the invoice total is $10,000, and the customer has 30 days to pay.
• Advance: A factoring company advances you 90 percent of the value. That’s $90,000 in your bank account right away. This usually means you have access to it within two or three business days, but some invoice factoring companies, like Viva Capital, offer same-day payments, too.
• Final Payment: When your customer pays the invoice, the remaining balance, minus a small fee, is sent to you.

Your fees are largely determined by invoice factoring rates, which are usually between one and five percent of an invoice’s value. They vary based on factors like your customer’s creditworthiness, the volume of invoices, and how long the factoring company expects to wait for payment.

Factoring vs. Bank Loans for SMEs

Late payment solutions for SMEs often revolve around bank loans. But, for short-term financing for SMEs, traditional loans often come with roadblocks. Approval can be slow, documentation requirements are heavy, and smaller companies may not qualify at all, especially if they have a thin credit history.

Factoring is one of the more accessible SME financial solutions. Since approval depends more on your customers’ ability to pay than your own financial standing, it’s often faster and more flexible. Let’s do a quick comparison.

• Speed: Factoring can provide funds the day you request them. Bank loans can take weeks or months.
• Flexibility: You can factor specific invoices rather than committing to long-term debt.
• Eligibility: Factoring relies on the strength of your receivables, which makes it accessible for most businesses with B2B invoices.

Factoring vs. Accounts Receivable Financing for SMEs

While factoring and accounts receivable (AR) financing are sometimes confused, they operate differently.

Factoring involves selling your invoices outright. The factoring company owns them and manages collections. With AR financing, you borrow against your receivables but remain responsible for collecting payment and paying back the balance. Here’s a snapshot of the key differences:

• Ownership of Receivables: Factoring transfers ownership. AR financing does not.
• Collections: Factoring companies manage it. AR financing leaves that task to you.
• Visibility to Clients: Factoring is often more visible to your customers, while AR financing can sometimes be done behind the scenes.

Both can be effective alternative financing options for SMEs, depending on how much control you want to maintain and how involved you want to be in managing collections. If you’re concerned about maintaining control of the payment process and customer communication, invoice financing benefits may seem more appealing. When speed and simplicity are priorities, factoring is usually the better option.

Benefits of Invoice Factoring

Invoice factoring benefits go beyond getting cash quickly. It also reduces the administrative weight of managing receivables and helps create more stability in your day-to-day operations.

• Improved Cash Flow: One of the best benefits is how factoring improves business cash flow without forcing you to take on debt.
• Built-In Credit Support: Because factoring companies run credit checks before accepting invoices for factoring, it helps improve credit management for small businesses.
• Lower Exposure to Defaults: Some factoring companies offer non-recourse factoring, a specialized form of factoring in which the risk of customer non-payment usually falls on the factoring company, not you. With more businesses having concerns about customer insolvency, reducing credit risk for SMEs is a major benefit. It can provide greater peace of mind and help ensure profitability, though the costs tend to be a little higher than traditional recourse factoring.
• Time Savings: Outsourcing collections frees your internal team to focus on operations, growth, and customer service.

Accelerate Payments for Your SME with Viva Capital

If you already have strong processes in place but slow-paying customers are making it challenging to cover everyday expenses and grow, invoice factoring can help. To kickstart the approval process, request a free rate quote.