Sufficient working capital is a must for small businesses.
Yet, as most business owners will agree, handling outstanding invoices can be a challenge - especially when prompt customer payments aren't always guaranteed.
It's a problem that continues to impact SMEs up and down the UK. So much so that 1 in 2 businesses started the latest financial year waiting on invoice payments from 2022/23.
1 in 4 outstanding invoices between one to three months late
1 in 5 between three to six months late
Difficulties navigating invoice terms
If you run a company and find yourself experiencing cash flow gaps or payment delays, you've likely longed for a different way to do business.
And if you've hesitated to take action, question yourself as to why this might be...
Do you fear negotiating with larger firms?
Do you worry that enforcing stricter terms will put your business at a competitive disadvantage?
Do you have long-standing relationships with which you don't feel comfortable rocking the boat?
If any of these feelings resonate, rest assured you aren't the only one.
According to a recent study involving 1,069 small and medium-sized enterprise owners, 32% admitted to feeling uneasy about negotiating when securing a deal.
Many of these respondents lacked confidence in their abilities and believed they lacked the necessary experience and/or skills to be successful in their efforts.
The case for late payment reform
It isn't just the small business community that want payment term norms to change.
The FSB's Time is Money: The Case for Late Payment Reform revealed:
62% of the British public feel that businesses should be paid within a week
55% would support more controls being put in place to prevent late B2B payments
In an ideal world, you'd invoice your client and receive payment in a matter of hours, not weeks or months.
However, in the UK standard payment terms are Net 30, meaning most small businesses wait one month to get paid.
And with the average outstanding invoice getting cleared 39.67 days after being issued, businesses are being forced to wait a further ten days to receive money owed.
An alternative solution
If you can't secure better terms for your business, you can leverage your outstanding invoices and receive faster payment through solutions like invoice factoring.
Previously, invoice finance required businesses to raise their full sales ledger and fund every outstanding customer invoice over a lengthy period (one year +).
Now, flexible solutions like Penny offer low-commitment models which are far better suited to small businesses' needs.
Penny finances invoices with terms of up to 90 days.
So regardless of whether you trade under Net 15, Net 30, Net 60 or Net 90, you can utilise Penny for full payment the next working day.
Example of how factoring outstanding invoices works with Penny
Sarah operates a small business that specialises in electrical work for construction projects.
She partners with a contractor and enters into commercial building work under a 90-day payment policy.
The subcontract agreement aligns with the contractor's payment terms, which means Sarah would have to wait 90 days after project completion and invoice submission to receive payment.
By this point, Sarah would have already invested significant resources (including labour, materials and equipment) into the project.
Sarah knows that this delay will put a strain on her company's cash flow and make it difficult to cover costs when taking on new projects.
For this project, Sarah is owed £32,000 and payment is due on November 26th.
Instead of being tied to the original invoice payment schedule, Sarah decides to open a free Penny account.
Upon registering her account, she raises a new invoice for this customer through Penny and gets offered a 6.2% +VAT processing fee:
Invoice value: £32,000
Net processing amount (excluding VAT): £1,984
Total VAT: £396.80
Rather than waiting three months to receive payment and potentially facing the consequences of:
Missing out on potential earnings from new projects
Struggling to cover operational expenses
Sarah accepts Penny's processing fee, receives £31,603.20 the very next day and embarks on her next project with immediate cash in hand.
Following up on outstanding invoices
In the UK, small businesses spend more than one week each year chasing payments, which means collectively, 56.4 million hours is taken up chasing outstanding invoices annually.
But perhaps even more worryingly than this is the fact that a third of UK businesses aren't following up on outstanding payments - with fear of damaging relationships, lack of capacity and time constraints cited as the top reasons why.
Invoice collection support
Penny's solution offers the additional benefit of collecting customer invoice payments on your behalf. Which means after an outstanding invoice has been successfully submitted, there's no need to follow up with payment requests or payment reminder emails.
Once you've accepted the quote and received next-day payment, Penny's collections department liaises with your customer's accounts team to ensure they make the payment due date.
Is my business able to use Penny Invoicing?
Chances are, yes! Take a read of Penny's business requirements below to find out for sure:
Accepted businesses: Limited companies and sole traders registered in England or Wales
Accepted debtors: Limited companies, local authorities or government departments in England or Wales
Accepted invoices: Outstanding invoices from £500 - £200K for completed work / delivered goods up to 75% through terms.
Accepted terms: Up to 90 days (overdue invoices not accepted)
What is an outstanding invoice?
An outstanding invoice is an invoice that a business has issued to a client for goods or services rendered, but payment has not been made. In other words, it's an unpaid bill that is still pending and has not reached it's payment-due date.
Outstanding vs overdue invoices
This type of invoice is different to an overdue invoice, which is the term used for payments that have not been settled and are past their payment-due date.
How can outstanding invoices impact businesses?
Outstanding invoices can have significant impacts on small businesses. One of the biggest risks comes with the working capital tied up in these payments that could otherwise be used to cover day-to-day expenses, or be used for business growth, expansion and investments.
Depending on the agreed terms, these invoices often result in large gaps between project completion and project payment, which in turn can:
Cause cash flow problems
Strain supplier relationships
Negatively impact opportunity cost
Increase the likelihood of needing to borrow
Escalate administrative burden
Result in uncertainty and stress
Lead to legal costs if outstanding invoices become overdue
How to better manage outstanding invoices:
To mitigate the negative impacts of extended payment terms, and prevent outstanding invoices from disrupting your company's financial stability, focus on implementing accounts receivable management strategies. This could involve:
Writing clear and detailed invoices that include payment terms, invoice number and due date, account details and accepted payment methods, penalties for late payment and contact information.
Establishing terms upfront and making customers aware of late fees, interest charges and compensation for overdue payments.
Using invoicing programmes and accounts software to automate processes like tracking payments, sending out reminders and follow-up emails.
Submitting outstanding invoices to Penny for next-day payment before they become overdue.
Setting up a collections process for unpaid invoices in advance (prepping collections letters, engaging with a debt collection agency, understanding the legal action to follow).
Credit checking new customers and to determine the likelihood of late payment before entering into an agreement.
Searching Prompt Payment Code signatories for large suppliers by company name online.
Considering partial payment upfront or retainers for high-value projects.
Setting up Aging Reports to evaluate payment cycles, identify late paying customers and optimise your collection efforts.
Offering early payment incentives, such as discounts for clients who pay in advance.