For most small businesses, the phenomenon of late payments is one of the biggest and most serious problems they can have. It can lead to negative cash flow and inhibit growth. When the problem gets severe enough, it can even threaten to outright kill a small business.
Not surprisingly, the severity of the problem varies by industry. Some industries are much harder hit than others. Some have to deal with it as a chronic issue.
Economic Sectors Most At Risk
- Energy and Utility
- Commodities Sector
- Food Service
- Freelance and Creative Sectors
Historically, construction has the most consistent problem with both late payments and non-payment. The large scope and high price of construction projects both contribute to this issue. According to one study, more than half of businesses in the construction industry saw this as a “significant problem.” In contrast, only about one fifth of businesses in sectors such as retail and restaurants were equally concerned. Nearly one third of construction companies claimed this had nearly forced them out of business at some point, compared with just 19% of factories and other manufacturers and a mere 5% of retail establishments.
Be Cautious About Dealing with Bigger Businesses
Surprisingly, it is not just individuals who pay late. Other businesses can be a big part of the problem. In fact, B2B companies typically have the highest days outstanding figures (the period that invoices remain unpaid). A 2012 Wall Street Journal report indicated this problem gets worse when the company you are billing is larger than you are. Larger corporations have a bad track record of delaying payments made to smaller companies. The problem is reportedly getting worse, with large companies pushing payments out as much as four months.
There are things you can do to minimize the negative impact on your business. Invoice clients promptly. Shorten payment periods. Send regular payment reminders. Use language in your invoices that assumes payment will be forthcoming. This is not merely good manners. It has a powerful psychological impact on people. If you really need help, outsource your invoicing to an accounts receivable management platform. Whether you are a small business or a freelancer, it can be well worth it to let someone else collect the money for you.