Press Releases
Prompt payment discounts diminish SMEs bottom line
Many small businesses are having to forego up to five percent of their bottom line each year to encourage early invoice payment so that they can meet quarterly tax instalments and other overheads such as staff, rent and insurance.
It is common practice for businesses to wait 30 days before invoice payment, however when lag times extend to 60 and 90 days, suppliers can experience serious shortages in cashflow.
To keep afloat during cashflow lulls and avoid hefty fees for late tax payments and other obligations, businesses are in effect paying their customers to cough up.
Greg Charlwood, Managing Director for cashflow solutions company Bibby Financial Services, said that prompt payment discounts of between two and seven percent, though unfair, are a reality for more than half of Australian SMEs.
“For many small businesses, prompt payment discounts are considered the only viable way to maintain a healthy cashflow.
“However the costs borne by SMEs to attract 30 day payment settlement equates to far more than a five or six percent sales discount.
“For example a small business that turns over $800,000 annually and offers a four percent payment discount on all invoices potentially loses more than $32,000 every year. If this amount was saved and invested at a decent rate of interest over five years, the company would have accrued around $195,000 to reinvest into the business.”
According to Charlwood, a growing number of SMEs across multiple sectors are turning to factoring to avoid the significant pitfalls of catering to late paying customers.
Factoring offers small and medium business operators access to a flexible source of finance by unlocking funds tied up in invoices, thereby creating an immediate injection of cash. This service is also referred to as discounting.
Charlwood attributes this growth in factoring to the need among SMEs for a flexible financing solution that banks loans do not offer.
“Bank loans can be very suffocating to small businesses who are forced to offer their business and even personal assets to secure the loan amidst uncertainty as to how their businesses will perform.
“Factoring on the other hand enables SMEs to vary funding arrangements in line with business performance and growth. Within 24 hours of credit approval, the factoring agent can inject cash into the business valued at up to 90% of its unpaid invoices.”
Factoring also provides a service to collect and administer debts on behalf of the SME.
