Late payments are the bane of small business owners’ lives – with fewer financial resources to fall back on than larger companies, late payment for services or goods can result in employees being paid late, or suppliers being made to wait for payments, potentially straining business relationships.
Other problems that late payments can cause include small businesses struggling to raise the capital needed to make investments to grow the business and valuable time being wasted chasing payments. In fact, online payments company GoCardless found that one in five SME owners spend up to three days chasing late payments during the summer, and one in 10 take nine days doing so.
The Office of the Small Business Commissioner reported that a third of payments to small businesses are estimated to be late, with an average value of outstanding payments of £6,142. A total of around £14 billion is currently estimated to be owed to small businesses, leading to 20 per cent of small businesses running into cashflow problems.
Late payments are often the result of larger businesses being slow to pay to smaller organisations. The collapse of construction firm Carillion, for example, left many businesses within its supply chain unpaid.
Tackling late payments more effectively could boost economic growth, with research from the Federation of Small Businesses claiming it could add £2.5 billion to the UK economy and keep an extra 50,000 businesses open each year.
Against this backdrop, the UK government recently proposed new measures to help small businesses benefit from more timely payments. These measures include empowering trade bodies to highlight best and worst practices to deliver practical improvements and promoting innovative technologies, such as the latest accounting software, to help small firms manage their payments processes better.
Any way in which businesses can minimise the impact of late payments would clearly be welcome. This could partly be achieved by reducing the complexity of invoicing and facilitating simple and rapid payment. Virtual banking can help tackle these issues for companies both making and receiving payments.
To start with, virtual banking supports mass payments in which hundreds or even thousands of payments can be made with a single mouse click. This makes the payment process more efficient and less prone to delays, taking away the onerous task of making payments and settling invoices one-by-one.
Virtual bank accounts also provide an online record of payments that can be linked directly to clients and suppliers. This gives a clearer picture of where money is coming from and going to, which should make it easier for companies that owe or are owed money to work out where they are missing payments. In turn, this will avoid unnecessary delays and help resolve any disputes that could result in late payments.
Because there are no hidden payment overheads with virtual banking, business owners can also have a near-real-time view of finances. This enables them to quickly understand how much money is available to them, so they can make provision for any late payments.
Once late payments have been identified, the ability of virtual banking to support rapid payments is also beneficial. With transactions often taking hours rather than days, any issues created by a late payments won’t be compounded by slow fund transfers.
While the responsibility for making timely payments and chasing late payments remains with finance teams, virtual banking can streamline the payment process to ensure that there is minimal delay in getting funds to where they are meant to be.
Efforts such as those proposed by the UK government could well bear fruit in improving the situation around late payments, but in the meantime the pain for small businesses can be minimised through virtual banking.