Unpaid Customer Invoices Are Piling Up, Squeezing Small Businesses

A new survey finds a majority of entrepreneurs reporting growing numbers of late payments that cost companies an average of $40,000 annually.

It’s tricky enough for owners of small companies to keep adjusting to unexpected developments that disrupt even the best-laid business plans. But entrepreneurs can really be thrown off balance when customers start paying their bills late — an income-choking delinquency challenge that a growing number of founders say is a serious problem.

The rising number of late payments to small-business owners was measured in a recent survey by invoice factoring specialist Gateway Commercial Finance. It polled 500 of those companies and found 73 percent reporting that customer delinquency numbers increased over the past year. That’s forcing entrepreneurs to take the time and effort to find diplomatic ways to nudge clients to settle their bills. But late payments are also considerably restricting founders’ cash flows, requiring over half to delay or cancel investment, expansion, or hiring plans.

In addition to the rising number of tardy payments, the length of customer delinquencies is also growing. Two-thirds, or 64 percent, of participants said they had invoices 90 days overdue on their books, with 12 percent waiting on bills 120 days late. The amount of money tied up in those outstanding notes represented, on average, 11 percent of companies’ total revenue.

Even when straggling customers finally pay up, the small businesses involved have usually lost money from either using credit — that carries additional interest charges — to compensate for the tardy funds, or through lost income opportunities. The average annual cost from late payments was $39,406, with 10 percent of respondents saying they suffered over $100,000 in related expenses.

How do entrepreneurs typically bridge those financial shortfalls while waiting for late payments to arrive? Top methods cited were short-term loans, credit cards, business lines of credit, peer-to-peer solutions, and merchant cash advances. Nearly 70 percent of respondents said they either used their personal savings or had taken on debt to cover decreased company cash flow.

About a quarter of participants blamed late customer payments for what they described as unstable liquidity levels. When asked how long their business could hold out if all invoices stopped being paid, a third of participants said they’d have three to six months, a quarter estimated four to eight weeks, and 18 percent said they’d last less than a month.

But even without those dire scenarios, late payments penalize small-company owners in other ways.

Just over half of business respondents said delinquencies forced them to postpone purchasing equipment or inventory, and 63 percent said they’d had to forsake business expansion plans. Some also had to pass the pain of late payments on to their own partners. Around 43 percent reported having belatedly settled bills with vendors because of a shortage of funds, and 34 percent said they’d been overdue paying rent or mortgage installments.

But respondents also confessed that what may appear to be the most logical solution to late payments is also too delicate to risk.

Fully 60 percent of participating founders said they avoid confronting customers over delinquent bills in fear of damaging their relationship. That discretion is all the more remarkable in light of 53 percent of respondents reporting having had to turn down promising business opportunities because of reduced cash flows from overdue invoices.

Aware that the rising problem of late payments may worsen, a majority of entrepreneurs are taking steps to protect themselves from the problems that produces. About 62 percent said they’ve now established contingency plans to bridge reduced cash flows from delinquencies, as well as to tide them over in the event of an economic downturn.

“Late payments are making it harder for small businesses to grow, plan ahead, or even keep the lights on,” the Gateway report on the survey said. “Business owners are starting to rethink how they manage these delays. Many are exploring faster, more flexible funding options to keep things running smoothly. The goal is to stay prepared, no matter how unpredictable payments become.”

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This article was written by Bruce Crumley from Inc. and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.