Last updated: 7th July, 2020
The benefits of paying businesses on time
Much is made of late payment across Europe, and deservedly so. It is an issue far from unique to the UK. Neither is it unique to sole traders or small businesses, although they tend to be the main focus. For any business of any size it pays to pay on time – it supports the supply chain, and helps to build trust and confidence for future trading.
Business Debtline, a support line run by the Money Advice Trust, suggested in a report that late payments are “business as usual” for many struggling small business owners in the UK. Nearly half of callers to the charity’s service have experienced problems with late payments from customers, with most typically having to wait up to two months beyond payment terms to receive the money they are owed.
Worryingly, 41% of Business Debtline callers affected by late payments said they knew what to do to chase customers who had not paid on time, and only 16% knew where to turn for advice on dealing with the problem. While many businesses worry that if they chase late payments they will lose future business, it is vital – regardless of if you’re a sole trader, freelancer or SME – that you have the confidence to do so.
Calls for a mandatory 30-day payment term
The findings have led to calls for a mandatory term of 30 days or less for big businesses to settle their invoices with smaller suppliers, and an appeal for various other sanctions including fines for businesses that fail to treat their customers fairly.
Whether a 30-day mandatory term is a good thing or not is a moot point; on the one hand, it will commit businesses of all sizes to standardise transactions between parties and across borders, while on the other, it removes a fundamental negotiating tool between those parties.
Smart businesses who are careful with their cashflow may be happy to agree to a longer payment term in return for a larger order, a longer contract or a better price. There is also the risk that the businesses providing perishable goods, who may usually be paid with seven days, may find their payment terms pushed out to 30 days or more in the law of unintended consequences.
Prompt payment is a two-way street
Paying on time or paying late, however, is a two-way street. It is also an issue that is not as simple as suggesting that all big companies are ‘bad’, and all small companies are ‘good’. To any company of any size, there is invariably a supplier into that business that needs to be paid for the goods or services it has delivered.
But why should any company pay another on time, especially given that they have their own cash position to manage? Surely it is better to hold onto your cash for as long as possible? Perhaps, but let’s look at this through a different lens. For some, it may sound counter-intuitive to part with precious cash more quickly. However, there are practical advantages to prompt payment that go far beyond ticking a compliance box or meeting an industry obligation.
Ensuring timely payments
As you might expect, it can take longer to pay your suppliers abroad than it does to pay your ones in the UK, so it’s important to factor this time in. Bank transfers are often vague when it comes to giving you an arrival time – taking up to 4 working days and passing through several institutions before they get to your recipient.
Other services, like PagoFX by Santander allows you to make payments with any UK debit card and your payment is processed the same day, meaning it can arrive in just a few minutes if you make it on a business day before the stated cut-off time (and for certain destinations). Cut-off points vary depending on the currency you are sending, and an estimated time of arrival will always be shown for your transaction.
Making sure that your payments are made as expected – that your recipient gets what they expect and that you pay a reasonable sum – can prevent any issues when you reconcile your payments and invoices. This is where transparency from your provider becomes essential. PagoFX gives you the real-time exchange rate such as that found on Google, Bloomberg or other online sources, with no hidden mark-ups, and we’ll always tell you exactly how much you pay and what your recipient gets before you press send. This gives you confidence, low fees and an easy way to pay your suppliers fast.
Building trust leads to more business in the long run
Paying on time, or even sooner than expected, builds trust with your partners – it establishes a strong customer-supplier relationship. In the future, from a position of strength, a prompt payer could be able to negotiate a better deal. They can also avoid issues like late payment interest charges and are far more likely to lead to more business in the long run.
A business that makes prompt payments communicates assurance and financial wellbeing to the market. People talk, especially within the credit community, and a good reputation is a valuable commodity that buys favourable treatment.
Building a reputation for treating suppliers fairly and paying invoices on time, makes you an attractive company to do business with. It is also likely to place you higher on the list in the event that an essential product, component or service is suddenly in short supply. Think of your local garage which, in a time of fuel shortages, only serves its regular customers. The same logic applies in business. The Tsunami and earthquake in Japan in 2009, for example, led to a global shortage of printed circuit boards (PCBs) which in turn put tremendous pressure on the supply chain. It also led PCB manufacturers to prioritise those customers with whom it had the strongest trading record.
Prompt payment brings certainty in uncertain times
Paying suppliers promptly is not the sole domain of a big business – everyone can benefit. Neither is it a domestic issue. Being seen as a good payer to international clients and customers breeds confidence. For instance, sole traders – and soon SMEs – can better manage the payment of international suppliers by using low-cost and secure international money transfer services such as PagoFX to ensure the fast and dependable transfer of funds.
As we live in constantly challenging times, it is important your business continues to be an attractive partner and brings certainty in an increasingly uncertain world.