Many small and medium business owners are finding that they spend an increasingly large portion of their time chasing money from unpaid or late paid invoices. This in turn hurts their profitability, as it takes longer to chase down an invoice than it does to just have it paid as agreed. In fact, according to a recent survey by the Close Brothers Business Barometer, as reported by the Independent, 51% of businesses are spending at least 10 hours trying to collect unpaid invoices and 41% of them have outstanding invoices of more than £16,000.
This causes businesses to be put in a position to borrow from banks in order to meet capital outlays or keep providing services. The alternative for business owners is often to lose productivity, which ends up hurting their bottom lines, and can ultimately cost the company in long-term revenue. It can also result in job loss, where key personnel are either let go, or end up finding more stable jobs with other companies.
Too often, these businesses end up on the losing end of a downward financial spiral, where they lose money to bank interest rates, and limit their ability to seek other financial remedy. This can leave them in a pinch when real capital is needed to expand or meet the needs of a new project. However, there are other alternatives businesses can use to shore up finances and make sure they are getting the best financial arrangements for their companies and themselves.
1) Angel Investors: Often, if a business is doing well, there are many angel investors who will be interested in providing funds and seed capital to help the business grow. These are seasoned investors, who understand the pinch late invoice payments can leave an otherwise healthy business in. They can provide not only funding, but also valuable investment and financial management advice and tips. There are a number of places business can go for these types of services, but it’s usually best to speak with an independent financial advisor to find the best Angels. As the Guardian reports, an Angel Investor can be a lifesaver for any business that meets the criteria for Angel investment.
2) Asset Leverage: Rather than taking out loans, existing assets can be leveraged to secure short-term or bridge financing. Due to the strength of these assets and their fair market value in terms of revenue generation or existing worth, they can be used to command much more favorable interest rates than are traditionally available to most companies. As above, a specialist lender or financial advisor is best equipped to provide advice on these options, and how they can best be used to shore up company finances, allowing for longer invoice delays, and freeing up management time for more productive tasks.
3) Peer to Peer Lending: This is another great option, where peer companies and individuals with no existing relations to an established business will consider lending sometimes very large sums of money to help keep corporate finances in a healthy state. Obviously these lenders are a bit wary of companies on the edge, but if your company is healthy and you just need to free up some breathing room to work around invoices that aren’t being paid on time, then this is a great place to look.
4) Personal Loans: While this is a bit risky, this type of loan will let you leverage non-business assets, like your home, or a large nest egg and raise capital that can then be injected into your company. Because most business owners have great credit ratings, but their business credit is separate from personal affairs, this can open doors that might otherwise be closed. It is something that only company owners will usually be in a position to consider, but as it is a capital investment in an existing business, it can often provide a better return from the corporate books than the loan interest rate elsewhere might cost. The end result is a net profit to the company owner who is investing, without losing that money to a third party lender who would be taking similar steps.
The most important consideration in any of these scenarios is what a company can afford to do and what sort of payments they’ll need to make in order to meet their obligations. However, the lost time due to chasing invoices is an item that should also be considered. For example, if a company owner is spending 10 hours chasing an unpaid invoice, that’s 10 hours they could be using to grow the business, create new products, or otherwise improve the overall financial health of the company. These hours are a cost and are almost always better invested in anything other than time spent trying to collect late payments.
Of course, another great thing to do is increase the late penalty on unpaid invoices, as they represent money that has already been spent, but for which there is no initial return. This is especially true of those businesses that are consistently late making their payments, which amounts to them having an interest free loan from your business. That’s not something anyone wants to do and it’s a bad investment of capital resources.