When you’re running a small business, you may occasionally need to pull in outside help. Most suppliers will then arrange for you to have an account and extend a line of credit to your business. This line of credit then allows you to make monthly payments.
While it’s essential to make payments on time and in full, sometimes payments can slip through the cracks or you may find yourself short of cash and unable to pay.
Failing to pay an invoice can have some severe consequences for the other business, result in additional interest and even hurt your credit score as late payments can stay on your credit report for up to seven years.
Maintaining a good credit record is vital as credit allows you to secure lending, arrange accounts with other companies and may even impact whether investors invest in your business.
Keeping reading to discover:
- Why you should pay on time
- How to improve your credit score
- How to avoid late payments
Why you should pay invoices on time
It’s essential to pay your invoices on time as late payments can have some significant consequences on your suppliers as well as your own business.
Late payments hurt other businesses
Finding a good supplier is like finding a needle in a haystack. You’ve worked hard to source a supplier who can meet your needs, understands your business and can deliver a high-quality service. Not paying them on time risks damaging this relationship, especially given the impact of late payments.
Late payments debt is currently at an all-time high of £23.4 billion and seriously impacts companies’ ability to continue operating, pay their staff and stay afloat. You don’t want to damage supplier relationships by placing financial strain on them or forcing them to let employees go.
Additional fees on late payments
In the UK, companies have the right to charge interest for late payment. Unless otherwise agreed in your contract, companies can typically charge you 8 to 15% on outstanding invoices, which only increases the amount you owe. If you’re already struggling to pay the invoice, you don’t want to face additional charges from late payments.
Impacts your credit score
Failing to pay your invoices on time can also impact your credit score. Credit scores are made up of lots of different pieces of information, so while a late payment does negatively impact your credit score, it doesn’t have to be a deal-breaker. However, depending on the credit you want to secure and the company’s lending criteria, you may face greater difficulties with your application.
How to improve your credit score
Once you’ve paid your late invoice, you may need to do some damage repair to rebuild or improve your credit score.
Improve your personal credit score
Start by looking at your personal credit score and making sure it’s as strong as possible. Banks and other lenders use a range of information, including personal credit score, to determine your risk levels and the type and amount of credit you can secure.
To improve your personal credit score, you can:
- Register to vote on the UK government website.
- Pay your bills on time, including council tax, phone bills, gas and electricity, etc.
- Determine if you share financial assets with other family members or your spouse as their credit will impact your credit score.
- Clear existing debt as lenders will be hesitant to supply you with credit if you already have lots of debt.
- Review how you’re currently using your credit, as using a lot of your available credit will impact your business credit score. Aim for 25% or less of your available credit.
Improve your business credit score
Once you’ve strengthened your personal credit score, you can focus on building your business credit score. To improve your business credit score, you can:
- Make sure all business information is relevant and up-to-date. For example, provide new details to Companies House should your address change.
- should your address change.
- Avoid submitting multiple applications that perform hard credit checks. Soft credit checks should be okay as they won’t impact your business credit score.
Remember, your credit history goes back for six years, so information older than seven years won’t remain on your report. While the above steps won’t change your credit score overnight, they will signal to lenders that you’re a legitimate business and decrease associated risks.
How to avoid late payments
Maintaining a healthy credit score also means avoiding debt and making sure your business remains financially viable. Rather than overborrowing or overspending, these tips can help you identify and understand any financial problems and prevent late payments in the future.
Review your spending
It’s essential to understand why the late payment happened. What factors are causing your cash flow problem — was it a one-time situation, or is it likely to happen again? Where and how are you spending money? Are any of your expenses unnecessary?
Create a cash flow forecast
Cash flow forecasts are a good way to predict potential problems and cash shortages ahead of time. By reviewing your previous cash flow, you can identify future cash gaps or months when you’re more likely to face issues. Once you have a good understanding of your spending, you can then make a plan to avoid late payments.
Make a budget
Once you understand your spending and future cash flow, you can then create a plan for covering your expenses and making payments on time. Creating a budget for your business is a great first step towards managing your costs and cutting back on unnecessary purchases.
Make finances easy with Countingup
When you sign up for a Countingup business current account, you get free built-in accounting software that allows you and your accountant to keep track of your books with ease.
We’ve automated the time-consuming aspects of bookkeeping and tax planning so you can focus on running your business. You also receive updates about profit and loss statements, cash flow insights, tax estimates, and instant invoices.
Keep your finances running like clockwork. Download the Countingup app today.