Does your business model allow clients to pay for a product or service at a later date?
Maybe you’re a construction company that does government contracts from time to time. Or you supply goods to a supermarket.
Regardless of the nature of your business, there’s nothing wrong with this model. In fact, it can help you increase your client base and keep your products moving.
Unfortunately, not all clients honor their payment obligations. Some will pay later and others, well, you have to chase your money for weeks or months.
Delayed payments can impact your business in a big way. Continue reading to learn what can happen when clients default on their accounts.
1. Disrupted Cash Flow
Every day, there’s money coming and going out of your business. This is called cash flow.
As a business, you want to ensure money coming in (revenues) is substantially higher than the money that’s going out (costs). This way, you’ll always have money to finance your everyday expenses and settle financial emergencies as they arise.
Delayed payments can disrupt your cash flow. One or two delayed payments aren’t going to cause any major disruption, but when several clients or one big client who was due to make a big payment doesn’t pay on time, you’ll certainly feel the disruption.
With less money coming in, you might need to dig into other sources to get the funds you need to fund your day-to-day operations.
2. Inability to Pay Your Suppliers/Service Providers
Your business has at least a couple of suppliers and service providers.
If you’re a manufacturing business, for instance, there’s someone who supplies you with raw materials. You have contracts with companies that provide security, cleaning services, electricity, office supplies, and whatnot.
Your providers will continue to offer you their services — until the day you’re unable to pay them. This is likely to happen if your accounts receivables don’t yield funds on time.
Did you just ask what is accounts receivable? This is money owed to you for a service already rendered or a product sold.
3. Defaulting on Your Business Loans
If you’re anything like the typical small business, you certainly have a business loan.
Business loans are an ideal source of funds but can land your company in real financial trouble if you’re unable to service them. Yet, this risk will become a real threat if delayed payments continue being an issue.
The worst part about business loans is they have a specific repayment period every month. Although some lenders allow some wiggle room, you’re likely to face fines or other charges if you don’t pay up on time. Your delayed payments, even though your clients will finally come good, won’t help you.
Delayed Payments Can Wreak Havoc on Your Business
There’s nothing wrong offering service and getting paid at a later date. Most professional business contracts run this way. However, if your clients fail to pay up what they owe you on time, then those delayed payments can throw your business into a crisis.
However, there are several measures you can put in place to protect your business, including having adequate cash reserves so you don’t have to rely on money that you’re yet to be paid.
Keep reading our blog for more small business tips and insights.