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How SME exporters can minimise the risks and costs of late payments

business-articlesHow SME exporters can minimise the risks and costs of late payments
UK SMEs have a serious problem with late payments. During 2017 over £13 billion worth of invoices, representing 62% of all bills issued by SMEs during the year, were paid late.
Three in 10 invoices were paid more than two weeks late, with some companies reporting that it took six months for bills to be settled.
Considering the average SME is owed £63,881 in overdue payments, these delays are a major problem for the small and medium-size enterprises in our economy.

Impact of late payments on cash flow

Having tens of thousands of pounds missing from your bank account can wreak havoc on your cash flow, which is often carefully calculated and forecast in order to protect your bottom line.
Having just one customer pay late may cause a problem, and things are complicated even further if the customer is located overseas.
This opens you up to currency market volatility, meaning that by the time you get paid the exchange rate may have worsened considerably, causing you to receive less in Sterling terms than if the invoice was settled on time.
With cash flow problems responsible for an enormous number of SME failings, getting on top of late payments is vital if you want to protect your business and continue to grow.
Here’s how you can ensure that your business can cope with late payments, if not prevent them.

Ensure you’re not slowing down the process

The first thing you need to do is make sure that you’re providing everything your customer needs in order to actually pay the invoice.
From checking that all of your details are correct to providing your request for payment in the preferred format, a few extra minutes spent preparing your invoices can save you weeks of cash flow headaches.
Format is very important, as many large companies will not process invoices unless they comply with their own in-house policy.

Use automation tools for efficient invoice processing

Automating your invoicing can help you stay on top of payments. Invoicing software not only ensures that it’s quick and easy to send payment requests – it also tracks when payments are due and notifies you if they are late.
Invoicing software can automatically send payment reminders shortly before an invoice is due to be paid, as well as overdue notices and demands for payment. It gives you a quick overview of all your sent invoices and which ones require further action.
This means you can start chasing a payment as soon as it’s overdue, while also ensuring consistency for your customers as your invoicing process and format will always be the same, reducing the chance of errors.

Get government help when exporting

Unfortunately, despite all your best efforts there are still going to be times where you get paid late. Luckily, there are several places you can turn to for help when exporting in order to protect your finances.
UK Export Finance is a government body run by the Department for International Trade (DIT) that aims to ensure no viable UK export opportunity is missed due to a lack of funding. They offer numerous ways to protect exporters financially, or help them secure the finance they need in order to get exporting.
Products include Export Insurance Policies that protect an exporter against non-payment or in the event that costs cannot be recovered due to some unforeseen circumstances. These policies are often granted to companies unable to find cover from traditional insurance providers, who may judge the market too risky.
UKEF also provides free and impartial guidance to help exporting companies manage payments.

Spread the risk

Large organisations can essentially use small businesses offering long payment terms to borrow interest-free. Many SMEs report problems getting large organisations to pay, as the scale of the invoices and the importance of the customer makes them reticent to do anything that could damage the business relationship.
While large organisations can be great customers, the more of your revenue that’s tied up in a single invoice or set of invoices the greater the risks to your business from late payment.
If possible, try to avoid relying on a single large client for the bulk of your revenue, as one late payment can spell disaster. By spreading your workload around multiple customers, you are also spreading the risk and making it much easier for you to cope with the impact of late payment.
It’s not a feasible strategy for every business, but it is worth considering.

Do due diligence on your customers – can they pay?

Before you extend lines of credit to new customers, you should make sure that they can actually afford to pay.
While offering flexible payment terms is a great way to win new business and can help to build a positive relationship with long-term customers, you need to make sure that they’re not asking for long payment terms simply because they can’t afford it and are hoping things will improve in the future.
Do your due diligence on customers before offering them generous payment options to ensure that they’re not overstretching themselves. If possible, split the bill into smaller chunks that have to be paid before the next tranche of your product or service is delivered to help you minimise potential losses.

Try to keep cash reserves

Putting clear invoice policies in place can minimise the risk of late payments, but you should still have contingencies to minimise the damage to your cash flow should a customer still fail to settle their bill on time.
Maintaining a cash reserve will help provide a buffer against late payments that ensures your business can still run smoothly with the least amount of disruption.

Use flexible forward contracts to hedge international payments         

We mentioned earlier that late payments from overseas customers can add another layer of complications to your cash flow by exposing your business to currency market risk.
With exchange rates easily able to fluctuate by more than 5% in the course of a month, a late invoice could see you potentially losing out on thousands of pounds if the market moves against you while you’re chasing payment.
One way to lock in your costs and minimise risk is to use a forward contract to fix an exchange rate when the market is in your favour, for use at a later data regardless of how the market has since performed.
Currencies Direct offer flexible forward contracts that allow you to drawdown multiple times before the contract expires, using the beneficial rate you froze even if the market has significantly weakened since.
This allows you to much more accurately forecast your cash flow, as you’ll know exactly how much you will receive in Sterling when an invoice is paid; even if it’s paid late.
While forward contracts are useful in all circumstances – not just for protecting against late payment – they certainly provide an extra benefit in the case of overdue invoices by removing the risk of loss of profits from negative currency market movement.

Make exporting pay

Late payments can be a real headache. You’ll never be able to avoid them completely, but by following the tips outlined above you can certainly reduce the frequency with which a customer doesn’t pay on time, as well as minimising the damage to your finances from late payments.
There are plenty of government and business advisors available to help you with the various aspects of exporting, and Currencies Direct is always on hand to answer your currency-related questions. Give us a call to discuss your requirements.


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