The Hidden Costs of Late Invoice Payments

By Petr Marek.

The old adage “the best place to find a helping hand is at the end of your own arm,” may as well have been written for small business owners. For as long as small and medium-sized businesses (SMBs) have formed the backbone of America’s economy, they have been defined by a fiercely independent and dogged spirit that has carried them through financial uncertainty, demographic shifts, and even the crushing closures during the COVID pandemic.

Yet, as economic headwinds intensify yet again amidst steady inflation and high interest rates, a new threat awaits: extremely low optimism. A May NFIB survey found that views of small business owners around future business conditions are at their worst levels in 50 years. But why?

New research from Invoice Home, conducted with third-party research firm Censuswide, unpacks the underlying factors behind this implosion in SMB confidence, pointing to a rise in late invoice payments as a driving force. Notably for fiercely independent SMBs, the problem cannot be solved alone. Thus, it has never been more critical for business consultants to work closely with clients to mitigate the prevalence of late invoice payments.

The Deferred Invoice Debacle

In the last year, the Invoice Home study found that 76% of small business owners have experienced at least one late invoice payment, leading to credit card debt (21%), delayed business payments (20%), and even missed rent/mortgage payments (10%). For SMB owners, a deferred invoice payment can be a huge threat to their livelihood and sometimes mean the difference in being able to put food on the table that week.

Alongside substantial mental and physical stress, late invoice payments also perpetuate business struggles well into the future. In the Invoice Home study, 4 in 10 business owners reported that they redirected funds originally intended for business development to compensate for the shortfall from a late invoice. The cumulative effects of these delayed investments can lead to small businesses falling behind technically, incapable of affording digital tools that could vastly simplify business operations. While late invoice payments are only one piece of the puzzle, their substantial impact on SMB well-being cannot be understated.

SMBs’ Growing Discontent

The rise of late invoices is playing out amidst a broader outlook shift among small businesses. In 2019, a study of over 1,000 small business owners found that a quarter expected to see a “significant increase” in revenue within the next year, and only 4% expected their revenue to decrease. By 2024, a study from the U.S. Chamber of Commerce found that SMBs expecting their revenue to decrease quintupled to 20%.

As SMBs are pushed to the brink amidst an economy that 59% feel no longer works for them, many are looking to work harder, recruit more business, and dig deep within to stabilize the balance sheet. Unfortunately, that strategy only works if invoices are paid on time, exacerbating a growing trend of SMB discontent. The last five years have been particularly trying for many businesses, and the prevalence of delayed payments is only furthering the problem.

A Paid in Full Future

Although a path forward may not always seem clear to small business owners in the doldrums, there are a few key processes that every business consultant should ensure their clients implement, aimed at abolishing late invoices for good. First, SMBs should look to establish clear payment terms upfront, managing expectations and minimizing the likelihood of late payments. Next, it’s imperative for businesses to utilize digital tools for invoicing and payment, automating invoicing and reminders for overdue payments. Not only can these tools reduce admin work, but they also greatly improve on-time payment. Finally, businesses can explore creative solutions, whether by offering discounts/incentives for early payment or taking on smaller scope projects in addition to large client work to offset payment delays.

Yet, even when considering all these measures, the most effective ways to combat against late invoice payments are the most straightforward of all: communication and financial planning. By maintaining an open line of communication with clients and planning for a rainy day with a robust emergency fund, SMBs will be more insulated than ever from economic calamity and its accompanying mental health struggles.

With SMBs on the brink, the solution is not a “helping hand is at the end of your own arm,” but rather a healthy community of advisors around SMBs to support goals like on-time payment collection and robust financial planning. The role of business consultants in this task, such as CPAs, accountants, and tax professionals, cannot be overstated. As economic pressures mount and inflation persists, encouraging partners are vital if SMBs are to retain their independent and dogged spirit, ensuring the continued well-being of America’s economic backbone for years to come.

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Petr Marek is the founder and CEO of Invoice Home, an invoice generating platform designed for small businesses, freelancers and entrepreneurs. Invoice Home currently has more than 9 million users worldwide.