Smith states, ‘It is not any scarcity of gold and silver but the difficulty which such people find in borrowing and which their creditors find in getting payment that occasions the general complaint of the scarcity of money.’ Getting paid on time can cause problems for both lender and borrower.
Smith suggests that in business trouble is unavoidable when, ‘The demand comes before the returns, and they have nothing at hand with which they can either purchase money or give solid security for borrowing.’ Ask your average small business owner today about the constant challenges they face and they would no doubt lament the same debilitating problems that Smith was talking about, over 230 years ago.
DEFINING IDEA…
If you can’t pay for a thing, don’t buy it. If you can’t get paid for it, don’t sell it. Do this, and you will have calm and drowsy nights, with all of the good business you have now and none of the bad.
~ BENJAMIN FRANKLIN, SCIENTIST, INVENTOR, STATESMAN, PRINTER AND PHILOSOPHER
But it’s not just creditors who worry about being paid on time. For thousands of UK businesses, especially small and medium operations, getting paid is a constant thorn in their side as they find big-business muscle continues to squeeze payment terms.
According to a survey conducted by Ciao Surveys on behalf of Barclays Local Business Banking small businesses in the UK were owed approximately £8.3 billion at the end of February 2008. The cost in time alone to chase late payments equated to a staggering 544,640 wasted working days. Almost 60% of small to medium enterprises experienced problems, with a third admitting that late payment threatened the day-to-day survival of the business. Just under 40% of small business owners confessed to using their own money to keep the business afloat while they waited for outstanding payments.
In an effort to alleviate this problem a number of innovative financial services have emerged, which were certainly not around in Smith’s era. The first, factoring, involves a business selling their invoices to a third party. This means that all their invoices are then sent out with the factoring company’s payment details and customers pay the factoring company directly. In return, the factoring company will pay the business up to 85% of the total value of the invoices, usually within two or three days. The factoring company, not the business, then chases any outstanding debt and charges a fee of between 3–5% of the total invoice for this service.
Invoice Discounting is very similar to factoring, except for one key difference. In factoring, the finance relationship is known to customers of the business. With invoice discounting, invoices are also sold to a third party but the original business still maintains control over its sales ledger and chases the debt itself. That way, the finance arrangement stays anonymous and the company can maintain and protect the business relationship. Both invoice discounting and factoring offer a cost-effective way to gain access to money tied up in unpaid invoices and improve cash flow.
HERE’S AN IDEA FOR YOU…
If you run a small or medium-sized business and find it difficult to consistently get paid on time by customers, you may want to investigate factoring and invoice discounting. It could work out cheaper and less stressful for you than chasing your own payments.