How to deal with late payments in your business

November 24th, 2021

Does it feel like you need to wait forever to receive money from your customers? You’re not alone — Xero recently surveyed 1,000 small businesses and found that 63% of them experience late paying customers. 

When customers pay late, it causes a flow-on effect that impacts a variety of people. 24% of small businesses reported deferring payments to themselves due to cash flow issues, with an additional 23% deferring payments to their creditors.

With cash flow being vitally important to the ongoing success of a business, how can small businesses manage their cash flow needs while they’re having to wait for their customers to pay them? An Invoice-backed Line of Credit can help.

What is an Invoice-backed line of credit?

An invoice-backed line of credit allows you to draw down funds when you need them, based on the value of your outstanding invoices. For example, if you’re waiting on $10,000 in invoices to be paid, and you need to access cash, your invoice-backed line of credit lets you access 80% of the money you’re waiting to receive.

 It’s different to a traditional business line of credit because you’re not actually borrowing the funds, you’re simply accelerating the cash flow without putting pressure on your customers. You withdraw the funds you need before your customer has paid their invoice, then once they pay, the line of credit is paid down directly. 

Benefits of an Invoice-backed Line of Credit

Benefit 1. Gives you access to cash when you need it

If many of your customers are taking their time to pay your invoices, you might find yourself struggling to keep up with everyday work expenses like inventory, supplies, rent, and staff wages. 

Having the ongoing ability to accelerate cash flow from unpaid invoices means you have the flexibility and resources to keep up with day-to-day business expenses or grab hold of business opportunities as they arise. 

As a line of credit is supported by outstanding invoices, the amount of available funding grows with your sales and can be used by early-stage, growing and established businesses across a wide range of industries.

Benefit 2. Reduces the risk of Bad Debt

At Earlypay, we can include trade credit insurance with our invoice-backed line of credit facilities. Regardless of your business type, size, industry, and how carefully you manage your finances, you’re unfortunately always at risk of some of your customers defaulting on their payments. Trade credit insurance helps to protect your profit and reduces the risk of bad debt. 

It’s estimated that for most businesses, the debtor’s ledger usually accounts for around 40% of its total assets. With accounts receivable forming such a significant portion of working capital, trade credit insurance is a sensible option for businesses trading both domestically and internationally to protect themselves against non-payment and guarantee their cash flow.

Benefit 3. No real estate needed for security

Because you are essentially borrowing money against your unpaid invoices, there are no other assets required to be offered as collateral. This can be a relief for those who would rather not have their business or personal assets (hello, family home!) tied up in their finance solution. It’s also helpful for those who don’t have any valuable assets to offer. 

Benefit 4. Offers a collections service

As part of our credit offering, we provide an optional collections service. If you’re in the 63% of small businesses who have late paying customers, having someone else chase the invoices could reduce stress and significantly free up your time. 

Benefit 5. Removes the pressure from late invoice payments

When your customers are late to pay their invoices, it can put a strain on your business as well as on your relationship with them. If you’re relying on your customers paying you on time so you can afford to purchase supplies for your next job, you could end up waiting around, with your frustration levels rising.

An Invoice-backed line of credit lets you access the cash before your customers have paid — so you can smoothly prepare for your next business move without stressing over when your customers are going to settle their account. 

While late paying customers can be stressful and inconvenient, an invoice-backed line of credit can be a simple way to manage the cash flow nuances that come with it — and it comes with extra benefits like trade credit insurance and collections services!

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].