Late payments are a leading cause for sabotaging the growth of small businesses. A hallmark of small businesses is the small amounts of capital they have, often provided by the owner themselves. Their survival depends on the cash flow they have in each financial cycle. Late payments threaten this by upsetting predictions and estimates.
The problems
Small businesses have little power to deal with late payments as their base capital is generally small. As a result, fluctuations in income can make them plunge into loss and debts. Small businesses often cover their losses from their own pockets, which causes further harm. When a small business is already at a loss, it cannot invest in future growth. This causes further losses where there could have potentially been profits.
The uncertainty caused by late payments is another factor. Small businesses cannot accurately project their earnings when late payments are often a problem. This means that they often cannot look beyond the near future, which hinders growth opportunities. Furthermore, the unpredictable inflow of cash means that small businesses cannot plan for sudden expenditures. Layoffs and/or conservative recruiting is another side effect of late payments.
Processing late payments opens up a whole new world of problems. While processing delays normally take up some time, in addition to late payments they become a significant problem. The time spent on following up with late-paying customers is another drain on the resources.
Reasons
Small businesses have less bargaining power than medium or large businesses. Thus, they have to settle for late payments on lenient terms or risk losing customers. They cannot risk hurting their customer relationship by being too firm with payment deadlines.
Another reason is that small business cannot often ask for advance payments. They usually can ask for payments after delivery of goods and services, which can lead to late payments.
Small businesses have little room for legal help when it comes to late payments, simply because it would lead to more expenditure when they are already in losses. Unlike them, bigger businesses can afford legal help.
Lack of awareness of governmental regulations that can help them is yet another reason. Often, small businesses simply do not know the steps they can take when a customer defaults on a payment.
Conclusions
Late payments are a leading reason why many small businesses go out of business. In their absence, many more small businesses could be functional and even profitable. Avoiding them will certainly help enable successful running of small businesses.