Why you should pay your invoices on time

Disadvantage of late payment

Paying your invoices on time is a great way to improve your personal credibility with suppliers and the credibility of your business. As well as being unethical, the practice of deliberately paying later than the agreed terms is wrong for sound economic reasons.

They maybe a number of reasons for late payments of invoices to you business, some may have clearly forgotten to pay it, lost the invoice, had a late submission of invoices or have insufficient cash flow.

Sometimes invoices are not paid due to arguing over the amount and raising a dispute or simply refusing outright to pay.

Faster invoice processing helps to save money, improves cash-flow, builds better relationships with your vendors, and frees up employees for other tasks.

However, probably less well known factor is the repercussions for the business owner that was expecting to receive the invoice amount. When you automate, you’ll likely start noticing some pretty significant improvements right away.

What are the benefits of paying your invoices on time?

There are a number of benefits of paying your invoices on time, these include the following:

You will not pay additional costs.

The 1998 act of late payment of commercial debts states all late invoices are charged a late payment fee. It, therefore, goes without saying that paying your invoices on time will eliminate these additional costs for you.

Most suppliers deal with unpaid invoices by way of include a penalty clause in their contracts that stipulates that there will be a late payment interest charged on the outstanding invoice amount and another separate flat rate for any costs incurred.

Helps establish trust with your suppliers.

To build trust with suppliers is to settle your outstanding accounts and pay your invoices on time. Building a positive financial history with your suppliers will be highly beneficial to you in the long term.

As suppliers also have other suppliers to pay or could be suffering financial problems of their own, they would benefit from the on-time payment, and be forever grateful to you for it.

Builds a better credit rating.

By settling your outstanding invoices with suppliers on time it will build your credit rating as well as the suppler will allow a larger credit limit, this will be a benefit if you need more stock or services in the future.

You’ll end up paying anyway.

If you can’t provide a valid reason to pay that is accepted by the supplier, you’re going to have to pay up. Don’t be mistaken that the creditor will simply let the issue go away un challenged. Suppliers will want to recover their money that is owed to them. While they do have a cost, numerous debt recovery procedures exist to encourage debtors to pay up on a no win no fee basis.

You wouldn’t like to be paid late yourself.

Lastly, the most beneficial and ethical issue clearly comes into the equation. If you sell a service or goods to somebody, you also want to be paid for on time.

There are as many good reasons for paying your invoices on time, but in order to avoid problems, costs and additional legal procedures that could be long and costly for you and your debtor, paying your invoices on time is often the easiest solution.

What happens if you don’t pay your invoices on time?

Not paying your invoices on time, or continuing to make late payments will always have a negative effect on your as a businessman or woman and the company you run. It will not only deter clients from wanting to deal with you, but also cause so much more collateral damage, such as:

    • It will weaken your organisation because it harms your reputation
    • It will damage your supply sources and strain your relationships with suppliers
    • It’ll weaken the economy as a whole because it constricts growth in multiple areas
    • Late payments often mean the buyer is going through a difficult period
    • Relationships are damaged which will allow your suppliers to worsen their terms

Late payment can also be symptomatic of poor relationships between you and your suppliers. A revolving credit facility may help to overcome this in a short space of time.

The way you manage your purchasing/sales relationship is important to your profit margins. A commitment by you to prompt payment can be a powerful aid to better buying; it will certainly produce closer, more co-operative partnerships between your firm and your suppliers, which is ultimately a great thing for you.

Large corporations in particular enjoy considerable purchasing power. That power carries responsibility. The flow of cash in the economy begins with large organisations as most receive government grants and should cascade, not trickle, down the chain of suppliers.

Paying on agreed terms injects more money into the UK industry; existing suppliers are kept healthy; new firms are encouraged to compete in the supply arena; buyers benefit from a wider range of supply sources and the UK economy becomes more competitive in the world market.

If you delay a payment or flatly refusing to pay an invoice it rarely works in your favour. Disputing the invoice can provide a few weeks reprieve while the supplier tries to collect, but eventually, sooner or later, you will end have to pay the invoice.

Failing to pay the invoice will only lead to court action by the supplier, if the supplier gains a county court judgment against you, this will have a domino effect on your credit rating.

It could force other supplier to request payment on accounts or cash up front to supply you goods or service.

Paying your invoices on time helps to build a better business

Both your reputation and purchasing power can rapidly grow if you commit to always paying your invoices on time. Making this commitment and ensuring you stick to it will offer you a whole host of benefits. These include:

    • Suppliers will be more tempted to work with you
    • You will avoid costly late payment charges or compensation claims
    • You will save on firefighting and strained relationships
    • When approaching suppliers, you’ll be more confident in your business’ approach
    • Your suppliers’ incentive for reliability will enable you to give reliable service to customers and help you to improve your relationship with them
    • Closer cooperation with your suppliers can lead to wider benefits
    • Customers with concern for efficiency and responsibility in business practice will reward your commitment by remaining loyal to you

Not paying your invoices on time can result in nasty knock-on effects

One in four business failures are a direct result of interruptions to cashflow. 90% of business owners say they would pay their suppliers on time if their customers paid them on time, which means unpaid invoices cause a domino effect to begin, hurting clients and other businesses in the process.

Though, it will ultimately always harm your reputation and deal the biggest portion of damage to you and your venture. Over 40% of small to medium sized enterprises would stop doing business with a customer that paid them late.

Only one third of PLCs pay their bills within 30 days, and over four years there has been no improvement in average payment times of plcs. This is something that needs to change for the better, as it will result in further success for all involved parties.

Government Rules for Late Payment

You can claim interest and debt recovery costs if another business is late paying for goods or services. This means that if a company is late making a payment to you, there is financial cover to be found, so don’t worry if this is the case. It’ll also allow you to discover what businesses you don’t want to deal with in the future.

If you haven’t already agreed when the money will be paid, the law states that the payment is late after 30 days for public authorities and business transactions after either:

    • The customer gets the invoice
    • You deliver the goods or provide the service (if you don’t pay your invoices on time)

Interest on late commercial payments

The interest you can charge if another business is late paying for goods or a service is ‘statutory interest’ – this is 8% plus the Bank of England base rate for business to business transactions. You can’t claim statutory interest if there’s a different rate of interest in a contract.

An example of this would be, if your business were owed £1,000 and the Bank of England base rate were 0.5%:

    • the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
    • divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
    • after 50 days this would be £11.50 (50 x 0.23 = 11.50)

You can receive free advice

If you are starting to pay your invoices late due to cash-flow problems Invoice Factoring may be a cash flow funding solution for your business.

If you would like more information, or a chat with an invoice funding expert, you can complete the online enquiry form today, and a member of our expert team will be in touch with you as soon as possible.

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