Late payment pertains to the inability to settle a debt or an invoice on or before the agreed-upon due date between the creditor and the debtor, which can encompass personal and business obligations.
One-fourth of all business failures can be attributed to late payments; even a single overdue payment can disrupt your cash flow. Pursuing legal action to retrieve the funds can be time-consuming and resource-intensive, and a late payment letter may need to be revised. This article will explore strategies for managing late payments and preventing them from occurring again.
Table of Contents
What Is Late Payment – Definition
When a borrower sends money to a lender or service provider after the payment due date or the grace period has elapsed, it is considered a late payment or a delayed payment.
Late payments can have various underlying reasons, including management issues, market conditions, or outstanding invoices from their customers. It is also possible for a customer to withhold payment to contest the order.
The Covid-19 crisis and the subsequent mandated business closures have resulted in a significant and persistent increase in late payments. While government aid has offered temporary relief to some businesses, the termination of these programs is expected to lead to a continued high rate of late payments even after the projected economic recovery.
Consequences Of Late Payments On Businesses
Understandably, businesses and companies have numerous payments to fulfill, and various factors can contribute to payment delays. However, regardless of the underlying reason, there are several adverse consequences that a business may face as a result.
- You are required to pay the daily recurring late payment fee.
- If the reason for the delay in payment is not communicated, the interest amount will be added to the subsequent payment.
- This could result in the termination of services or defaulting on a loan, and the late payment can also be reflected on your credit report.
- The severity and frequency of late payments are assessed based on the number of days overdue, and this information is used to categorize them on a person’s credit report.
Irrespective of the cause, when commercial debts are paid late, your trade receivables can be transformed into bad debts, resulting in a temporary or permanent cash loss. This can impact your financial forecasts and other businesses in your network.
Late payments can also result in additional costs and time for your business. Writing letters to follow up on late payments requires extra work hours, and compensating for the income shortfall may require obtaining a short-term loan or overdraft, among other things.
How Late Payments Can Affect Your Business?
Inadequate working capital may prevent a business from pursuing new projects or making new sales
Late payments can have a detrimental effect on a business’s cash flow, limiting its growth potential. The resulting insufficient cash flow can hinder the business’s ability to undertake new projects, fulfill large orders, and invest in new equipment, as there is a fear of overextending their financial exposure. As a result, the business may lose its competitive edge. Additionally, the time and resources spent chasing customers for payment can impede the business’s growth.
Affecting your cash flow may lead to the incapacity to cover operational expenses
Small businesses, such as SMEs, are more vulnerable to the effects of limited cash flow, as their cash reserves are typically weaker than those of larger, established businesses. This cash flow shortage can hinder their ability to cover operating expenses, resulting in operational inefficiencies. In some cases, they may need to take out loans to meet these expenses.
Failing to pay suppliers on time can hurt the future relationship between a business and its suppliers
The limited cash flow resulting from delayed customer payments can prevent businesses from paying their suppliers on time. This situation can lead to strained commercial relationships, as suppliers may become unhappy with repeatedly chasing the business for payment. Such suppliers may be unwilling to continue doing business with companies that take an extended period to pay their invoices. They may even terminate their relationships with businesses that consistently make late payments. Consequently, this can damage the business’s relationships with its suppliers and hinder its ability to pursue future working opportunities.
The inability to fulfill creditor demands can lead to a poor credit rating, potentially impairing the ability to obtain credit facilities in the future
Late payments from customers can have a negative impact on a business’s credit rating. Insufficient cash flow resulting from late payments can cause the business to be unable to meet its creditor demands, such as paying off loans or credit card bills. Late payments on these bills can result in a drop in the company’s credit rating, as credit bureaus factor in late payments when evaluating credit scores. A lower credit score makes it more challenging and expensive for the business to obtain credit facilities in the future.
In the worst-case scenario, late payments can lead to the closure of a company
Late payments can have severe consequences, and in some cases, they can lead to the closure of a company. When a business does not receive payment on time, it can negatively impact its cash flow, resulting in various issues, such as an inability to pay suppliers, insufficient working capital, and inability to pay operating expenses. These issues can be so severe that businesses that cannot manage their limited cash flows may be forced to shut down.
Managing the collection process and ensuring timely customer payments is crucial for businesses to maintain a healthy cash flow. To address the limited cash flow caused by late payments, businesses can turn to invoice finance as a solution. This allows businesses to unlock outstanding invoices and access immediate working capital to support their operational needs. Compared to applying for a cash credit from a bank, invoice finance is a faster method to obtain funds. While bank credit approval can take a while, invoice finance can provide funds within 24 hours after the required documents have been submitted. By utilizing invoice finance, businesses can free up cash tied down in their accounts receivables and use these funds immediately to keep their operations running smoothly.
Breakdown Of The Impact On The Credit Due To Late Payment
The company’s credit rating and tendency to make late payments are closely related. A credit rating indicates the company’s dependability when it comes to borrowing money and repaying it on time.
Late payment by a company impacts its credit score, and the extent of this impact depends on the number of days the payment is overdue.
Credit reports typically categorize late payments as 30 days, 60 days, 90 days, or 120 days overdue.
Here’s a breakdown of how late payments can affect your credit score:
- Payment delayed by 30 days
- Payment delayed by 60 days
- Payment delayed by 90 days
- Payment delayed by 120 days
Payment delayed by 30 days
There are two crucial scenarios to consider: one where the payment is delayed by less than 30 days, and the other where it is delayed by 30 days or more.
Less than 30 days late
Missing a credit card bill payment or loan EMI by less than 30 days typically does not impact the credit score. In such cases, a grace period of 30 days is usually provided to make the payment and avoid any adverse effects on the credit score.
However, suppose the payment is delayed by less than 30 days. In that case, the company may still face certain adverse consequences, such as being charged late fees and possibly experiencing an increase in the interest rate on the credit card or loan.
- Late payments may result in the company being charged fees, and
- There is also a possibility of an increase in the interest rate on the credit card.
Delay of 30 days
Missing a credit card bill payment or loan EMI by 30 days may impact the credit score only if it happens frequently. In such instances, the lender or banking institution may consider the borrower’s payment history and circumstances.
Generally, if the delay is only for a single instance and not a regular occurrence, it may not significantly affect the credit score. However, if such delays occur repeatedly, the credit score can drop by as much as 100 points.
Payment delayed by 60 days
Missing a credit card bill payment or loan EMI by 60 days can substantially impact the credit score. One of the key drawbacks of such a delay is that it gets recorded on the credit report since most lenders report to credit bureaus every 30 days.
Payment delayed by 90 days
If a company misses a credit card bill payment or loan EMI by 90 days or more, it will be reported on the credit report and classified as a non-performing asset (NPA). Such a late payment can remain on the credit report for up to seven years, negatively impacting the company’s future loan eligibility and interest rates. This could also hinder the company’s creditworthiness and potentially impact its plans.
Payment delayed by 120 days
If a company misses a credit card bill payment or loan EMI by 120 days, it will be marked as “collection” on the credit report. Such a delay can be extremely costly for businesses and result in a significant decline in credit scores, often worsening it. Credit scores account for a lot of information, but they are often considered a deal-maker or deal-breaker for companies with good or poor credit scores, respectively. Late payments can devastate credit scores and, in severe cases, can result in a formal default or court judgment. All of these scenarios can significantly impact a company’s future growth potential.
How long does a late payment stay on the credit report?
Recording a statement of late payment on your credit report typically results in it remaining there for seven years. However, as time goes by, lenders tend to focus more on recent credit history, causing the effect on your credit score to diminish.
Companies are advised to prepare their future payments in advance and ensure they are paid promptly to enhance their creditworthiness and obtain more favorable credit terms.
Suppose you had a 30-day late payment reported in June 2017, but you made the account current in July of the same year. In that case, the late payment would disappear from your credit reports in June 2024, seven years after its initial report.
Similarly, the same principle typically applies if you miss two consecutive payments. For instance, if a 60-day late payment was reported in June 2017, but you brought the account currently in August of that year, both would be erased from your credit reports in June 2024.
How to remove late payments from your credit report?
Let’s start with the basics: If you have overdue bills, paying them off as soon as possible is best. As previously mentioned, the negative impact of a late payment on your credit scores can worsen if you allow the delinquency to persist.
Suppose you aim to take another step and attempt to eliminate a late payment from your credit reports. In that case, there are various methods you can explore, each with its approach depending on the specific circumstances.
Write A goodwill letter
While success is not guaranteed, you could consider drafting a goodwill letter. In this letter, you can detail your past interactions with the lender, current circumstances, and acknowledgment of the mistake. While this approach may prove effective in some cases, it is uncertain. If you have a proven track record of timely payments, you may have a higher chance of success with this method.
Negotiate
Negotiating with your lender is another possible strategy for erasing a late payment from your credit reports. You may be able to persuade your lender to eliminate the derogatory mark by proposing a partial settlement or agreeing to pay off the debt entirely. If you come to an arrangement, be sure to obtain written confirmation.
Dispute errors on your credit reports
If you notice an erroneous late payment entry on your credit reports, you can dispute the inaccuracy with the credit bureaus. You are entitled to contest mistakes on your reports, and if the credit bureau cannot verify the information’s correctness, it must remove it. It is also advisable to inform the relevant lender that you are disputing the data they reported to the bureau. Often, lenders will provide an address for dispute resolution.
How To Avoid Late Payment?
As previously discussed, companies make every effort to prevent late payments, but unforeseen circumstances can arise.
If you cannot make a payment on time, the most crucial step is to promptly reach out to your creditor or service provider in writing and explain the reason for the delay. Since they are already aware of these last-minute issues, they may offer a temporary solution.
Moreover, you can take three primary and effective measures to prevent future late payments and stay on top of due dates.
- Set up reminders
- Select auto-debit option
- Opt for weekly-fortnightly payments
Set Up Reminders
Considering the numerous bills and obligations that companies must fulfill, it is advisable to avoid relying on memory and instead set up reminders to ensure timely payments. You can leverage technology like applications, calendars, and accounting software like Deskera to monitor your invoices and payments. These tools can provide a comprehensive overview of the amount, number, and maturity dates of your outstanding debts.
Moreover, you can request that your creditors or lenders send you payment reminders before the due date, ensuring they are also aware of the payment schedule and can facilitate timely payments.
Select auto-debit option
It is common for companies to occasionally forget payment due dates, as humans are not infallible like machines. One option to avoid this issue is to authorize the issuer to automatically deduct the outstanding amount from the company’s bank account each month by opting for the auto-debit feature.
For instance, if a company purchases a car, it could include an auto-debit clause in the contract allowing the issuer to deduct a fixed amount from their bank account on a specific monthly date. This approach can ease the burden on the company and eliminate the pressure of setting aside funds for payments.
Opt for weekly-fortnightly payments
To avoid late payment fees and interest rates and maintain a good credit score, companies sometimes make weekly or bi-weekly payments instead of monthly payments when they receive payments in the middle of the month. By doing so, they can better manage their balances and ensure timely payments. These strategies and setting up payment reminders, and opting for auto-debit options, can help maintain financial stability.
This article discussed the negative impact of late payments on credit scores. While occasional late payments may be unavoidable, frequent late payments can significantly damage one’s credit score and history. Therefore, companies must take responsibility and prevent late payments by implementing various methods.
Failure to do so may result in additional costs such as interest, fees, and penalties, which affect the company’s future and its brand image, potentially hindering its growth in the long run.
