Thriving and succeeding, even with slow paying customers
A steady flow of income is essential to a business’ health. Unfortunately, you can't always count on each of your customers paying on time.
The impact of a customer that does not pay on time depends on the size of the customer, of course. A small customer will probably not create too much trouble, but a large customer can create a lot of issues and can even reduce your business’ stability.
The consequences often go further than the single late payment. Because of late payments, a business might - for example - need to borrow money to start a new project. This then in turn has an impact on the creditworthiness of the business and its ability to get future loans. If this happens too often, it might start limiting the businesses options significantly.
In the short term, a customer that takes too long to pay means you will either have to postpone your own payments or pay out of pocket.
Sure, you could argue that you have your company's reserves, but that is not what these reserves are preferably used for.
Late paying customers can become a systematic problem for a business that compounds overtime and creates instability which in turn creates additional problems.
The benefits of a reduced time to payment
Aside from the obvious fact that you will have access to funds sooner rather than later, reducing your time to cash has a few indirect benefits that you may not have considered before but can have a significant impact.
- You get to pay suppliers early. suppliers want their money as fast as possible as well. If your position allows you to pay them faster, some suppliers will start treating you as a preferred customer. In some cases, this may even amount to certain discounts.
- Be able to take on larger projects or orders without hitting internal cash flow limits. Working with large orders or large customers often requires some initial investment. These costs need to be covered up front and reducing your time to cash makes it easier for you to work with larger customers. Anything you would need to fund up front, you can now fund more easily without putting the rest of your company's operation at risk of running out of funds.
- Increased scalability. Because of the fact that you can now take on larger orders without much concern, your business suddenly becomes a lot more scalable than it is before. Of course, there are still limits, but if your business has not reached its capacity limits, reducing your time to payment will allow your company to grow faster. In addition, because of the fact that you will not have to loan money to cover expenses to take on a new customer, your creditworthiness isn't affected, and you still get to loan money two invests in your capacity.
So, how can you reduce your time to payment? Let’s take a look at three strategies that can help.
It all starts with the contracts that you have with your customers. While this may be difficult to do when you are dealing with very large companies, negotiating your contracts and payment terms in a way that favors you is definitely possible, especially with smaller companies.
But, even with larger companies, there is often some leniency to be had.
For example, if you have suppliers of your own who give you discounts when you pay them on time, you might be able to leverage that.
You may want to consider giving your large customer a piece of the discounts that you would receive yourself and use that as a motivation for your customer to work with you.
It all comes down to having the conversation and seeing what you both can do to achieve that goal.
Unfortunately, this doesn't always work and in case it doesn’t, you might need to look at how your company operates and make some changes there.
Reduce your overhead
As companies grow, they often take their old structures with them. Usually, that means that there can be quite a few processes that you can optimize.
Of course, this is a slow process that takes some time and effort. But the benefits can sometimes be substantial and are lasting.
Optimizing your company may make you more competitive and increase your company's flexibility at the same time.
Leverage your invoices
The solution that can bring your company the most drastic improvement in time to payment is called factoring.
With factoring, you basically sell your invoices, and pay a small fee to the company paying you upfront.
Factoring can reduce time to cash significantly, from a month and a half to only a few days. Most importantly, it often doesn't rely on debt and has no impact on your company’s credit rating.
that means that thanks to factoring it is much easier for a business to take on larger projects or larger orders. Ideally, factoring goes hand in hand with an update to your payment terms as well.
Done well, factoring can be a powerful tool for any business to have.
A business can choose to factor every invoice, or only factor a few key invoices every once in a while. Either way, it creates a strategic advantage for a business and is specifically designed to accomplish what we’ve set out to solve: Reducing time to payment.
Combine all three
Ideally of course, a business is best off when it combines all three of the above strategies.
Doing so can give some companies a surprising amount of additional headroom to grow and keep pushing for that growth.
And, during hard times, getting through them will be a lot easier.
Lose the organizational overhead, optimize your relationships formally, and leverage your assets effectively without impacting your company’s debt.
Do all that, and your company will be in great shape to meet future challenges head on.