Ian Duffy, CEO of Accelerated Payments
Cash is the lifeblood of any business, but cash flow issues haunt even the best-run companies. According to JP Morgan Chase Institute research, the average business has only 27 cash buffer days in its operational runway. If cash stopped flowing in, then within a month, most companies would not be able to cover rent or make payroll.
Smaller businesses have typically battled to collect prompt invoices from larger companies, as larger companies often use their market power to force concessions. This has only been made worse by the pandemic, with the number of unpaid bills almost doubling throughout the UK at the height of the COVID-19 pandemic.
When larger businesses do not promptly pay invoices, it is not usually for lack of funds. Instead, it stems from inefficient payment structures and the failure to accurately track or analyse data from suppliers. Many accounts payable departments still run on paper, with paper invoices being costly in terms of storage and riskier than digital records.
Invoices filed inaccurately can take a long time to track down. Invoices with incomplete information can automatically get blocked, which means that accounts payable departments cannot keep their original payment schedules. Most commonly, there can be slow approval processes, which lengthen payment turnaround times.
Electronic invoicing, also known as e-invoicing, addresses these issues. E-invoicing is the exchange of the invoice document between supplier and buyer in an integrated automated format. Digitising systems allow automation, converting manual flows into instant and computerised tasks and increasing payment processing speeds of every workflow.
The global market for e-invoicing is set to grow to £516 billion by 2024, largely due to widespread government adoption and technological innovation. As governments in many countries look for a way to tackle tax loss, they have started enforcing regulatory paths to encourage adopting the e-invoice practice. EU member states have brought in mandatory e-invoice legislation for public procurement.
Tech start-ups are also introducing new, practical solutions and making e-invoicing a cost-effective billing tool. Web applications allow a more robust user interface, enabling online submissions of invoices in multiple formats, increasing the adoption of e-invoicing across businesses of varying sizes and geographies.
While e-invoicing helps businesses better control their cash flow, it ultimately does not solve the root of many companies’ problems around late paid invoices. Sending automated reminders is one thing – but actually getting the liquidity into the bank to keep things moving is a game changer that can keep a company from going under.
According to the UK banking platform Tide, the pain inflicted to businesses by late payments is chronic and widespread: on average, one in six small business invoices are paid late. This varies between industries: small businesses operating in the IT and telecoms sector see payments arriving 12 days late on average, while small businesses in media (such as marketing, advertising, PR and sales) see payments arriving over 30 days on average.
However, if businesses have never-ending late invoice problems, e-invoicing will not ultimately be the only solution required. E-invoicing can manage the issuing and reminding of invoices but cannot guarantee prompt payment, as there are only so many late reminders that can be sent.
Instead, companies are being forced to be more innovative about how they collect payments. Some businesses have started offering discounts to encourage on-time payment. Other methods include changing how a company pursues unpaid invoices and the payment channels it will accept. Email and digital channels tend to be more effective than phone calls as employees continue to work from home. Subscription models can also lead to more reliable payment.
Another innovative approach to tackling the issue is single invoice financing. Single invoice financing helps small businesses get advances on cash they are due from specific individual invoices. Single invoice financing companies tend to work flexibly with an SME, choosing how many and which invoices they use. This provides easy access to funds without incurring fees on every invoice or financing an ongoing credit line.
Accelerated Payments Limited (AP) for example provides such a service in several European and North American markets. AP’s technology platform can streamline the settlement of invoices between suppliers and buyers as well as offering suppliers the option of funding some or all of these invoices. This gives suppliers the option to dynamically match working capital needs with a line of funding from invoice financing. AP is also planning to launch a service during 2022 that will allow third party e-invoice providers to use AP’s invoice financing module to provide their clients with invoice financing services.
The model works particularly effectively for smaller businesses that might be providing services for industry giants or larger companies with complicated organisational structures and approval processes. Companies that take advantage of the freedom and flexibility of invoice financing do not just use the funds to survive but can also thrive and scale, as they can simultaneously access credit or traditional forms of investment for further growth.
As more companies are paying attention to how they address the cash flow issues arising from late payments, they are also examining the broader context and addressing how to fund future goals around hiring, technological investment, and expansion. This is where invoice financing can go beyond a short-term solution and be a critical factor in long-term growth.
