According to a survey conducted by Bibby Financial Services - Flexible Cash Flow Solutions , almost one in two small business decision makers reports that they have experienced overdue customer payments in the past 12 months.
A majority of those surveyed (42%) feel that their customers are resorting to excuses for slow payments. The survey was conducted on over 200 small businesses in Australia (excluding retail) at the end of June 2011.
The Bibby Small Business Barometer by debtor finance specialist Bibby Financial Services reports that late payments caused at least 25% of small businesses to experience serious cash flow shortages in the past 12 months.
According to Greg Charlwood, Managing Director of Bibby Financial Services, late payment is a serious problem for small businesses in Australia with many struggling to meet liabilities on time and many contending with non-payment.
Bibby’s findings are parallel to Dunn & Bradstreet’s recent Trade Payment Analysis for the June quarter 2011, which found the number of ‘severely delinquent’ payments (90 days or more overdue) jumped by almost 20% compared with the June quarter 2010, meaning businesses are waiting for over three months for much needed cash.
According to the Bibby Barometer, over half of all small businesses offer early settlement discounts to encourage prompt payment and a discount in the range of 1% - 4% is most common. Despite the attractive incentive, 30% of those that offer early settlement discounts find them to be ineffective in encouraging prompt payment.
The Bibby survey found 52% of small businesses that deal with big companies and government clients are frustrated with slow payments and when considering outlook for payments terms, small businesses remain pessimistic. At least 38% of small businesses are expecting the length of time they must wait to be paid to increase further in the coming quarter, which will place considerable pressure on cash flow management.
In addition to slow payment terms, Mr Charlwood lists out other key challenges identified by small businesses in the months ahead including rising interest rates (30%), reduced consumer spending (30%), increased staff wages (29%) and increasing fuel costs (28%), which together would lead to some tough times for these businesses.
As many as half of small businesses reported that cash flow is now more difficult to manage than it was 12 months ago, with the result that they are increasingly using debtor finance as one of the most effective ways to increase cash flow.
Debtor finance also referred to as invoice discounting or factoring, operates by turning unpaid invoices into cash almost immediately. Unpaid invoices or receivables are sold to a discounter who converts 85% of the value of each invoice into cash within 24 hours. Once payment has been received on the invoice, the remaining 15%, less a service fee is returned to the client.
Since the onset of the global financial crisis (GFC), one in four small businesses has considered debtor finance as a way to manage cash flow. Those with 10-19 employees and annual turnover of $1 million or more are more likely to have considered debtor finance, according to the Bibby Barometer.