How to avoid the ‘90-day club’

Delayed invoice payment a problem? Read on.

Online research conducted by market research consultancy Opinium with more than 500 UK small and medium sized enterprise (SME) decision-makers, published in January this year, found that 61 per cent of invoices issued by UK SMEs remain unpaid within the agreed debtor day period.

Almost three-quarters (70 per cent) of firms say they rely on getting paid during their debtor day period to avoid facing a shortage of working capital.

The research shows that one in six (16 per cent) SME invoices remains unpaid after 90 days and, of these, almost half have still not been settled after six months.

Medium-sized businesses with between 50 and 249 employees are the worst affected by delayed payments with a quarter (24 per cent) of invoices remaining unpaid after their debtor day period or not at all.

The study underlines the extent to which SMEs rely on a small number of customers and delayed payments from these can have serious consequences. According to the findings, SMEs' top three customers on average account for almost half (49 per cent) of their overall revenue.

There is also a psychological impact on business owners caused by lengthy payment delays. Almost a third (28 per cent) said it has caused them considerable stress and anxiety and a fifth (19 per cent) reported that their frustration had turned into anger. One-in-ten (10 per cent) admitted they became scared their business would go bust.

To mitigate the impact of late payments, growing numbers of SMEs are turning to invoice finance to secure reliable cashflow. While 8 per cent of firms said they currently use invoice finance an additional 19 per cent of business owners plan to use it in future, including 11 per cent in the next 12 months.

Invoice discounting arrangements are advances made against the value of invoices, typically 80 per cent to 90 per cent of their value. They are not the cheapest way of raising finance but they can be extremely helpful for companies with rapid growth because the security will allow higher borrowings in line with the expansion.

The lender will undertake some due diligence, examining your accounts and carrying out a detailed analysis of your sales ledger history and credit control procedures. There is a spin-off benefit because this can help introduce improved credit control disciplines into your business.

This type of borrowing is more appropriate for manufacturers, distributors and service providers than it is for retail and cash businesses or those allowing returns and refunds.

Invoice discounting leaves the ledger in your control and you are responsible for collecting payment and for credit control and can be on a disclosed or undisclosed (confidential) basis – meaning it is disclosed or not on your invoices. Factoring is the same as invoice discounting except that the factoring company is responsible for the credit control function and this is priced in accordingly.

The advent of single invoice discounting or selective invoice discounting means that you can now just use invoice finance selectively on as few as one or two invoices without having to sign a lengthy agreement or pay minimum monthly fees. Although both these requirements are currently being eroded with some providers issuing one contracts with one-month notice periods and no minimum fees. This can be very useful when you need help to pay VAT, PAYE or Corporation Tax bills or to fund purchases that you must make to fulfil a large order you have just received.

Pegasus Funding Resources offers a free service under which we will put the invoice discounters or factors into a competitive pitch for your business to ensure that you get the best terms possible.

  • Do you have the time or the experience to survey this complex market yourself?
  • Do you know the questions to ask and what is negotiable and what is not?
  • Do you know which companies to go to for your special requirements and circumstances?

Pegasus Funding Resources has a panel of more than 44 factors and invoice discounters and has the experience and knowledge to get the best deal for you. This service is completely FREE of charge.

For more information contact Richard Olsen on 0203 327 0567 or email: info@pegasusfunding.co.uk.

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