According to recent research, an overwhelming 93% of businesses face delays in payments from their customers, which puts increased pressure on their sales and marketing teams to recoup the loss of profits. Furthermore, the process of collecting the money owed can be time-consuming and require considerable effort, potentially involving the use of debt collection agencies or lawyers. These delayed payments can have significant negative impacts on businesses, including reduced value, limited ability to pay suppliers, delayed hiring, and hindered growth or diversification.
The impact of late payments is disproportionately high on small businesses, according to a study. It found more than half of all small businesses suffer delayed payments from corporate, public sector, and non-profit clients. This has led affected businesses to endure strained vendor relations, postpone hiring, and even reduce employee hours.
The outcome is that the average business organization is forced to write off 1.5% of payments due.
What Is a late payment?
A late payment is an amount receivable (AR) by a business for goods or services delivered but yet to be paid for by the customer. It is the amount of money outstanding after the payment due date or any applicable grace period for payment has elapsed.
There are usually various reasons behind a late payment, including market conditions, management issues, or disputes. In general, payment delays and late payments are common issues in the GCC and MENA region, particularly in sectors such as construction, real estate, and hospitality. According to a survey conducted by Coface, a credit insurance company, the average payment delay in the region is around 88 days, with the United Arab Emirates having the longest average delay of 97 days. Late payments can have significant impacts on small and medium-sized enterprises (SMEs), which may struggle with cash flow and liquidity issues.
In some countries in the region, there are legal provisions to address late payments. For example, in Saudi Arabia, the government has introduced a new system that requires government agencies to pay their bills within 30 days, and private companies to pay their suppliers within 60 days. The UAE has also implemented a new law that allows SMEs to file complaints against late-paying customers and receive compensation.
Overall, late payments still remain a significant issue for businesses in the GCC and MENA region, and there is a growing awareness of the need to address this problem.
How to best avoid late payments?
The best way to deal with late payments is to avoid them as much as possible. This calls for a careful balancing act.
On the one hand, cash flow delays can severely hamper your business operations. But being overly cautious can leave you with missed business opportunities.
The following are some of the steps you can take to walk the middle path:
Use payment processing solutions: Technology can help streamline the financial administration of your business. The right software can make it easier to keep track of payments that are approaching the deadline.
Set up effective payment terms: Your payment terms should be helpful for both parties. Have them drawn up by an experienced legal advisor, so they reflect your business goals while minimizing the time taken to realize pending payments.
Know your customer’s creditworthiness: Before reaching an agreement with your client, assess their ability to pay on time. Take the time to research their credit report, payment history, and general market reputation.
Establish a credit policy: Consider establishing a credit policy that outlines your company's guidelines for granting credit to customers or clients. This can help you determine which customers or clients are more likely to pay on time and reduce the risk of late payments.
Have a collections plan: Develop a plan for how to deal with late payments and collections. This should include escalation procedures and policies for dealing with customers who consistently pay late or fail to pay.
What do you do if you are unable to collect?
Even after you’ve made all the preparations to avoid it, some late payments may be inevitable for various reasons - including client bankruptcy, changes in regulation, and civil and political unrest.
You need to change strategy if a client is not forthcoming even after their payment is past due. These are some of the steps you can take to encourage your customers to pay up fast:
Assess the value of the payment and the client: Sometimes, it might make more sense to write off the payment and blacklist the customer rather than spend time, money, and energy required to collect it. However, do this only when you’re not dealing with a high-value client and if the payment under consideration is a relatively small one.
Consider a partial payment or installment plan: The best way to deal with a client with a genuine cash flow problem is to set up an installment plan. That way, you get to keep your client and still get your money back over time. Although it’s not the ideal case, some circumstances may require you to agree to a partial payment so you can get at least some of the money back.
Make it easy for your customer to pay: This is where flexibility comes into the picture. If you’re chasing a late payment, make it easier for the customer to pay by any method - credit card, check, or other payment platforms. Some of these options might involve processing fees, but that should be fine under the circumstances.
Take legal action: This is the last resort when all other options - calls, reminders, late payment notices - fail. You can either hire a collection agency or go to court. Both options involve expenses, so you need to do a careful cost-benefit analysis. Think things through carefully before engaging in either of the options.
By reporting instances of late payments or defaults to credit risk companies, you can aid other businesses in avoiding similar situations and safeguarding themselves against financial losses. Moreover, sharing negative payment experiences can enable you to monitor delinquent customers and make more informed decisions about extending credit in the future.
Final Thoughts
Late payments can and do make even the best-laid business plans go under. As a business owner, you need to recognize this risk, make allowances for it, and have a plan of action ready to meet each individual case of late payment.
Cedar Rose is a business intelligence company with an innovative Trade Rate Tool that can help you in this regard. This tool gives you access to reliable data on a company’s payment history based on feedback from other businesses.
Additionally, Cedar Rose also offers a Credit Risk solution, which provides in-depth insights and guidance on assessing credit risk for businesses. Our service covers topics such as credit reports, credit scores, credit risk assessment models, and strategies for managing credit risk. It also provides tips for establishing credit policies and procedures, and best practices for monitoring and managing credit risk over time. This resource can be a valuable tool for businesses looking to make informed credit decisions and manage credit risk effectively.
Get in touch with Cedar Rose if you need help with credit risk management.
Call us on +357 25 346630 or request a call back through our website.