How does late payment affect a company?

Better late than never? Late payments hurt small businesses

Waiting for your money is grueling and often you feel completely helpless. Why are more and more bills getting late and how is that affecting the small business?

Small and medium-sized companies are increasingly being asked for longer payment terms. And often they cannot assert themselves, especially against their large and influential customers.

Late payment infographic

Why are there late payments in the first place?

There are a number of reasons (or excuses) for this: Your customer may be having financial difficulties, generally disorganized, or only paying when he (or she) feels like it. Your customer may also use the outstanding payment as leverage if they are not entirely satisfied with the result or use their size to achieve unfair payment terms and thus improve their own cash flow. Or maybe you are only very low on the priority list because you are not actively claiming the outstanding payments and have not used your rights until now.

An expert in invoice processing, Esko Penttinen, Professor of Information Systems (Professor of Practice) at Aalto University Helsinki, explained how paper invoicing affects payments: “We did a case study with a large Finnish city. By switching to electronic invoicing alone, payment delays could be almost completely eliminated. "

He also admits that sometimes the reason for late payments is due to the customer's financial difficulties. He adds, “Companies struggling financially may prioritize critical suppliers. That means they pay the bills that are absolutely necessary to keep their business going. "

How do late payments hurt small businesses?

Intrum Justitia found in its report that late payments can easily get small businesses into a vicious circle. If they receive money too late themselves, they too cannot pay their suppliers on time.

In a report by the European Commission, the latter explains that small companies in particular are very reluctant and seldom to take legal action because they fear that this will damage their business relationships.

Professor Penttinen explains that the effects of late payment receipts also include difficulties in cash flow planning and the efficient use of liquid funds: "This is particularly harmful for small companies with limited financial resources."

In addition, the default interest also adds up. “In the Finnish case study, the city administration previously had massive costs related to late payments (over € 100,000 per year),” explains Penttinen.

Are there differences in Europe?

While there are major cultural differences between northern and southern Europe, Professor Penttinen believes that the reasons and consequences for late payments are in principle the same across Europe.

He admits, however, that Northern European companies are generally addressing the problem with more force, including exceptionally short payment terms of just 14 days. These are mostly adhered to because "Finnish companies want to keep their contracts in any case."

The rest of the EU is more flexible. The EU directive on late payments states that 60 days should be the regular payment term in B2B. Some countries go one step further and set the maximum payment term in their respective laws: Germany with 30 days, Spain with 60 days and France with 60 days or 45 days at the end of the month.

Intrums CEO concluded that “we need new initiatives to establish a radically new culture of direct payments” to support European entrepreneurs and small businesses.

Zervant offers a simple tool that enables entrepreneurs to keep track of all of their invoices and organize all of their invoicing. This makes it easier to identify possible cash flow problems at an early stage and to act accordingly in order to master this challenge without any problems.

Are your bills paid late?

We have summarized the main reasons for late payments in Germany, Finland, France, Sweden and Great Britain for you. We have also listed the three biggest impacts. Have fun watching!