Are late payments to suppliers affecting your business?
Small businesses in dynamic environment can face several challenges. One of them being late payments to their suppliers. Managing your cash flows in face of uncertainty can have a huge impact on your business. To keep the business running smoothly, we need to first understand this challenge in depth.
Starting out with the basics. Late Payments- Why did it happen?
- Administrative Errors
Poor record keeping is often the reason for late payments to suppliers. Small businesses often use traditional systems for accounting and maintaining sales records. Manual sales ledger and other systems are slow and highly prone to errors. Mismatch in accounting could lead to errors in payments due to creditors. - Access to credit
Utilising credit to manage working capital is a very common and effective way for businesses. But for small businesses, this can be quite a difficult task due to lack of access to quick business loans. - Seasonal Fluctuations
A lot of small businesses have seasonal demand which can affect their cash flow management. In case your business offers credit to customers as well, their default on payment can also pile up on your existing slowing demand. - Unforeseen Circumstances
At times, a business can default due to factors which cannot be predicted beforehand. A prime example of such a situation is the Covid-19 crisis. In this scenario, low sales of your business and your debtor’s can add on excess debt burden.
Now we have a broad idea as to why one might default on their payments to suppliers. The next step is then to see the level of impact it can have on one’s business.
- Fees and Penalties
Hefty late payment fees and penalties are one of the major consequences of failing to fulfil payments on time. The rate of fees is generally mentioned beforehand in the contract with the suppliers. The more one delays on payment the higher the fees become. - Business constraints
Late payments can restrict normal business operations. First, a business can lose out on early bird discounts. Second, it is harder to procure additional material if you already have due payments in your account. Additionally, this does not affect just the suppliers you have defaults with, but also other existing and potential suppliers. - Impact on Reputation
In small businesses, negative word of mouth travels quite fast in the community. Late payments to even a single supplier can impact a business’s reputation and damage their credibility for future partnerships as well. Your creditors might be hesitant to extend credit to your business in case of defaults.
It is quite clear that late payments have a high negative impact on your business. To avoid this problem, we can suggest a few solutions:
- Digitized systems of record keeping
Keeping sales and purchase invoices in a digital format can help your business to avoid errors and mismatch. Timely and accurate record keeping will help reduce the chances of late payments due to administrative errors. - Flexible Payment terms
It is essential that you understand your business cycle during normal business environment. This can help you to get an understanding of the time and rates you can afford to pay back your suppliers. If those terms are negotiated beforehand with flexibility in case of contingencies, defaults can be avoided. - Financing options
To avoid cash crunch and late payments, businesses can also go for external financing. Business can manage their payments by going for short term financing options like Invoice Discounting. Invoice discounting facilitates immediate payment to suppliers and managing cash flows for businesses. - Forecasting cash flows
It is a very common and essential practice for businesses to forecast their cash flows. This is especially helpful for businesses that are highly affected by seasonality. If you know that your business might lag during certain periods, it is important that you keep reserves to fulfil any due payments during that period. - Relationship Building
As we have already mentioned before, businesses run on trust and building strong relationships. If you have maintained good relationships with your suppliers, they might understand your situation and extend credit in difficult business circumstances.
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Conclusion
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected NBFC, we take pride in offering a diverse range of secured business loans, spanning from 25 lakhs to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days.
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About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.
