Why it is important to pay your invoices on time!

Thomas Minarik
9 min readJan 7, 2021

Paying your invoices on time is a great way to improve your personal credibility and the credibility of your business.

One of the biggest things that affect a business’ reputation is whether they pay their invoices on time or not. It is something that determines how credible you are as a business.

The quicker you pay your invoices, the quicker your business’s cash flow does its complete cycle; the slower you pay them, the more stretched out it becomes. That can affect your business’s different aspects, even if you don’t see it right away.

Here are 9 good reasons why you should always pay your invoices on time.

1. Financial Consequences

One of the first reasons is that if you delay your invoices, you must deal with financial consequences, directly or indirectly.

When we think about a potential financial consequence following a late invoice payment, one of the only things that come to mind is a possible “late charge” you might have to pay.

Many suppliers have a set fee they may charge you if you end up clearing your invoices later than their given deadline, but this isn’t the only way you could suffer financially.

If you become known for the company that pays their invoices too late, your reputation as a business is affected. People who would have worked with you in an instant would become wary instead and might not even consider doing business with you because of your reputation.

That would make growing your company increasingly difficult because you will not have many people willing to work with you.

Late invoice payments damage the relationship you may have with your existing suppliers.

Since they are the ones with the goods, they might drop you as a client and prefer working with someone else, someone who doesn’t delay their payments, so their business doesn’t suffer because of late payments.

Even though you might think it would be easy to replace a supplier, that might not be the case if they drop out at a crucial point in your ongoing projects or orders.

Your suppliers might not trust you in the business in the future. That can make it increasingly difficult to get your supplies on time, and if there are issues at the backend of the business, they will affect everything that happens on the front.

You may end up needing to delay your orders and projects, and this can lead to you losing your clients as well.

2. You must pay the invoice eventually anyway!

One of the main reasons you should pay your invoices on time is that at the end of the day, or month, you do have to pay the invoices anyway.

The payment you owe the suppliers must inevitably be cleared eventually and clear it sooner rather than later. It is possible that while you deal with keeping up with all your deferred payments, you end up in more debt than you can clear.

Something like this may sound on the more “extreme” end of the spectrum, but when you think about running a business with a limited amount of money available at different times along the year, it seems a lot more possible.

All it takes is a few angry suppliers, and you might end up having to wrap up your business altogether.

Planning your expenses and payments out in advance and making sure that you clear payments before racking up significant debt will be the best way to keep your business and yourself safe from potential bankruptcy.

3. It becomes easier to approach suppliers and clients in the future

When you are running a reliable business, it multiplies the number of people that want to work with you. It’s when you are looking to approach new clients or suppliers, you can smoothly go into the negotiations with all of your numbers in tow.

Show them how you have always worked against the clock and how everyone who does business with you gets to be worry-free about the potential of running into cash flow issues because you make sure that you pay your invoices on time.

That alone will tempt several businesses to pick you to work with over another business. This can skyrocket your growth, in a way that is much easier than you might have initially thought. Sounds interesting? It is indeed!

4. A good relationship with your supplier “pays” too

When you are notorious for being a business that clears invoices on time, suppliers and clients will automatically trust you more than a business they know nothing about, or one that is known for not clearing their invoices on time.

Often, this doesn’t just mean that your experience with the suppliers or clients will be smooth sailing. Still, many of them may even go the extra mile to provide you with a better service than the people they usually do business with, just because they have the peace of mind that you will be paying them on time.

It also means that you might negotiate better rates with the existing suppliers and clients in the future. Once you have a good enough relationship established, people are more likely to want to continue working with you, even at different rates. This can help you increase your profit margin as well, without even growing your actual business.

5. The same goes for the buyers or clients you have

If you are in a business where your output depends on how quickly your suppliers get you your supplies, having a good relationship with your supplier will inadvertently also affect the way you provide to the people who buy from you.

If you are always receiving on-time deliveries, you will be able to deliver on time yourself. This not only means that your buyers will be satisfied with your service but also prompts them to return. It is somewhat of a virtuous cycle.

You pay your supplier on time, they have a good experience and don’t have to deal with cash flow issues. This, in turn, helps you provide a better experience to your clients, which prompts them to want to keep coming back to you.

It’s one of the key factors that helps your business grow exponentially, in a way where you don’t have to deal with a lot of hurdles.

6. It requires less effort overall

If you end up in the cycle of late payments, you have to think before taking every step. You might end up having to deal with several different things if you make late payments regularly.

Dealing with compensation claims can be a lengthy and strenuous process. It requires you to take a large chunk of time out to fight the lawsuits.

It might be your precious time that you could be spending on your business instead. When you end up having to take time away from your business, any outstanding orders you may have will end up suffering as well.

You might find that while you fought an outstanding payment claim, you ended up missing out on order, which leads to the possibility of ending up missing even more payments. If this goes on, it will become increasingly challenging to continue to keep your business afloat.

Now, that is something no business owner wants to go through, trust me! Setting up a business is difficult enough if you end up having to shut down, building another one up from scratch can be even more difficult to do.

7. You may have to pay a “commercial interest” if your invoices are cleared late

Your suppliers can choose to charge you a commercial interest if your payment is late for over 30 days. This interest would be a statutory interest in the UK (8% in addition to the base interest Bank of England has specified for businesses to business transactions)

For example: If your business owes £1,000 and the Bank of England base rate is at the moment at 0.5%:

the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
after 50 days this would be £11.50 (50 x 0.23 = 11.50)

8. Businesses in the Public Sector have it worse

If your business is in the public sector, you don’t just have to clear your invoices on time because of all the reasons we have already mentioned, and you need to do it because the law requires you to.

On February 25 2015, it became a requirement by law for all the businesses in the public sector supply chain to ensure that each of their payments is cleared on time. “On time” is the set 30 payment terms.

Furthermore, you need to publish a payment report each year that shows that you didn’t miss any payments. That isn’t only to curb the culture of late payments; there are other uses too.

According to the “Prompt payment policy” by the Government of UK, effective September 19, 2019, if an organisation bids for “a central government contract over £5 million a year”, they will need to prove that they are paying their invoices on time.

These aren’t only a few invoices here and there.

At least 95% of the total supply chain invoices need to be cleared within a 60-day window if they want to work with the government on any project. Even if a company is a perfect fit for a project, if they have not been complying to this policy and it is found that they delay their invoice payments, they will automatically be considered ineligible to apply.

To be eligible for a government contract, you will have to show proof that not only do you pay almost all of your invoices on time up until the application, but you also have a proper system in place to be able to keep up with the invoices and to ensure that none are missed.

In addition to this, there also needs to be a standard of procedures to ensure that even if there is a dispute about a specific invoice, the conflict is resolved quickly.

If you cannot show that your company adheres to a proper payment system, you will be asked to explain why not and how you plan to fix the problem. Safe to say, the failure to pay your invoice can lead to significant losses if you are a business owner that was planning on applying for a government contract.

This could set you back by months and leave you ineligible until you keep up with the invoices for a long time and prove it.

9. Your business could land on a late payment directory

Before everyone used the internet in their daily lives, the culture of late payments was worse.

People didn’t have that many places where they could report late-payments and the companies that were deferring the payments kept on doing it to other people, and most of the time got away with it too. Today, things aren’t that simple.

Social media was one of the main tools people used to “out” companies that would not make payments on time. That would help warn other companies to be wary and lead to people not working with certain businesses.

The problem with this was the fact that not everyone would see these posts. The business would still have the opportunity to pay their invoices late but now, we have late invoice payment directories.

Any business can use late payment directories like this one brodmin.com to list the businesses for consistently delaying payments.

Potential suppliers and clients can quickly look up the business’ name on this directory and see a full account of what happened with the specific payments.

If you get reported enough times, or if the reports are strong enough, it would automatically make the potential suppliers and clients turn to one of your competitors and take the business to them instead.

Businesses need money to stay afloat. You would want your customers to be paying you on time, and it only makes sense that you follow the same yourself to ensure that your business runs smoothly and that of everyone involved in your supply chain.

Sources:

  1. https://www.gov.uk/guidance/prompt-payment-policy
  2. https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt#:~:text=on%20late%20payments-,Interest%20on%20late%20commercial%20payments,for%20business%20to%20business%20transactions.
  3. https://brodmin.com/payments/late-payment-of-commercial-debts/

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Thomas Minarik
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brodmin.com is a global late invoice payment directory.