Chasing late payments can quickly become a draining task for small business owners. When cash flow is tied up in overdue invoices, you’ll struggle to run (and grow) your business; meanwhile, employees and suppliers still expect to be paid promptly, and customers still expect your services and/or products on demand.
In Xero’s 2024 State of Small Business Report (Xero, 2024), we see the painful reality of late payments. Nearly 50% of small business owners spend a total of one to two months every year chasing overdue payments. That’s valuable time and money lost to something that can feel completely out of your control. But is it?
Breaking Down the High Cost of Late Payments
Let’s take a closer look at how late payments can be detrimental:
1. Financial Impacts of Late Payments
When businesses don’t have cash on hand, they face the opportunity cost of not being able to reinvest in their business. For example, you might miss out on taking advantage of bulk purchase discounts, hiring new talent, or investing in marketing campaigns to drive growth. Without the liquidity to operate efficiently, your business can struggle to maintain momentum.
In South Africa, many small businesses heavily depend on one or two large clients for a significant portion of their revenue – sometimes up to 50-70%. When these large clients impose long payment terms (often 30, 60, or even 90 days), the small business is forced to wait for its money, which disrupts its ability to operate effectively.
Larger companies – typically with more financial power – may be incentivised to extend payment terms in order to improve their own cash flow and working capital. This practice, while advantageous to big companies, can leave smaller businesses at a disadvantage. Small business owners may be reluctant to demand quicker payments or challenge payment terms due to their dependence on these larger clients. This imbalance in power means that small businesses are often left struggling to meet their own financial obligations while waiting for payments that could have been made much sooner.
2. The Administrative Burden
Chasing late payments takes up valuable time and resources. Business owners or finance teams often dedicate hours each week to follow up on overdue invoices – time that could be better spent growing the business or improving products and services.
Moreover, the cost of managing late payments doesn’t stop at just phone calls and emails. Sometimes, small businesses may need to send formal reminders or even engage debt collection agencies or legal services to recover outstanding debts. This not only adds additional financial strain but can also damage relationships with clients, which is particularly dangerous for businesses that rely on a small customer base.
3. Long-Term Impact on Business Goals and Planning
One of the most damaging aspects of late payments is their ability to disrupt long-term business planning. With unpredictable cash flow due to delayed payments, business owners find it difficult to create accurate financial forecasts or set realistic growth targets. This uncertainty makes planning for hiring, inventory management, or capital investment much harder.
How to Protect Your Business From Cash Flow Disruptions
Here’s what Merchant Factors recommends to combat cash flow disruptions and maintain your business operations:
Take Advantage of Invoice Factoring
If your business struggles with late payments, invoice factoring can be a powerful solution. By selling your outstanding invoices to a factoring company, you can access cash immediately, meaning you don’t have to wait for clients to settle their bills in order to grow your business.
With invoice factoring, you’ll receive an upfront payment, with the remaining balance paid once your customer settles their debt.
1. Set Up Payment Milestones for Larger Projects
For larger, long-term projects, break down the payment into milestones or instalments. This reduces the risk of clients delaying the entire payment until completion. By structuring payments into smaller chunks, you ensure regular cash flow as work progresses, which helps protect your business against large overdue amounts at once.
Instead of waiting until the end of a project, why not agree on smaller payment points based on deliverables or phases of the project? This gives clients a sense of commitment while reducing risk.
2. Use a Payment Reminder Service
While sending reminders manually is standard, using a dedicated payment reminder service can add a professional touch and reduce the administrative burden. These services send automated reminders via email, SMS, or even phone calls at your chosen intervals.
3. Tie Future Business to Timely Payments
One way to avoid the issue of late payments is to condition future work or services on timely payment of existing invoices. Make it clear that no new projects or services will be initiated until past-due invoices are settled.
When signing a new contract or discussing future projects, you could include a clause stating, “Future work or product delivery will be contingent on settling all outstanding invoices.”
4. Personalise Your Payment Requests
Instead of using generic reminders, personalise your communication. A quick phone call or a tailored email can make a big difference. Personalising the request lets clients know their payment matters to you and can foster a stronger relationship.
5. Introduce a Payment Plan for Struggling Clients
Rather than allowing payments to remain overdue indefinitely, offer a flexible payment plan for clients who are struggling financially.
If a client has overdue invoices but is genuinely struggling, work out a structured payment plan that’s manageable for them and formalise it in writing. Having a plan in place increases the chances of getting paid over time, without burning bridges.
6. Use ‘Soft Collection’ Tactics
Soft collection tactics refer to taking a more friendly approach to collecting overdue payments, without immediately resorting to legal or formal collection methods. This could include offering clients payment options or extended deadlines that maintain a good relationship while encouraging payment.
Instead of aggressive collection methods, send a message saying, “We’d like to work with you on getting this settled – please let us know if you need to set up a payment arrangement.”
7. Incentivise Payment via Direct Debit with “Payment Loyalty” Programs
Loyalty programs aren’t just for customers – they can also be applied to payment processes. Offer a “payment loyalty” program where clients who consistently pay on time receive benefits such as discounts, priority service, or first access to new products or services.
Perhaps set up a “loyalty” system where clients who pay on time for six months in a row receive a 5% discount or priority access to new products/services.
Be aware, however, that giving discounts is costly. For that reason, we don’t recommend it, but acknowledge that it is an option for businesses.
Break free from the cycle of late payments, starting in 2025. Consider working with Merchant Factors for invoice factoring to prevent cash flow disruptions. Contact us today, and let’s chat about how we can help your business grow.
References
- Xero. (2024). State of South African small business. Xero. Retrieved March 18, 2025, from https://www.xero.com/uk/reports/state-of-south-african-small-business/.
