Your Customer Has Not Paid and Payroll Is Friday

The call tends to come on a Wednesday or a Thursday. A customer who has always paid on time has not paid this month. Nobody at their end is returning calls, the person who signs things is on leave, and payroll runs on Friday.

Nothing about the business has gone wrong. The work was done, the invoice was raised, the money is owed and it will arrive. It is simply not there yet, and Friday does not move.

The money is not missing. It is late. Those are two different problems and they have two different answers.

First, be clear which problem you have

This decides everything else, so it is worth thirty seconds before you pick up the phone to anybody.

If the business is profitable, the order book is reasonable, and the shortfall exists only because money you have already earned has not yet arrived, you have a timing problem. Timing problems are fixable, and they are fixable quickly.

If the shortfall would still be there even if every customer paid on the day, you have a trading problem. No form of finance fixes that. It postpones it, usually at a cost, and the same conversation happens again in ninety days with more debt attached to it.

Most of the calls we take are the first kind. It is worth saying plainly, because businesses in this position often assume they have done something wrong. Being owed money you have already earned is not a failure. It is the ordinary condition of trading on credit terms.

What most people try first

Usually in roughly this order, and with mixed results.

• Chase harder. Always worth doing, and occasionally it works by Friday. It depends entirely on somebody at the other end choosing to act.
• Ask the bank to extend the overdraft. A reasonable request, but the answer tends to arrive in weeks rather than days, and it arrives after Friday.
• Take a short term business loan. This is the quickest conventional route, which is why so many businesses end up with one. The difficulty is that you repay it out of next month’s trading, and next month’s trading was never the problem.
• Put directors’ money in. It works, and it is the most expensive money in the business, because it is the money you cannot get back in a hurry if something else goes wrong.
• Pay somebody else late instead. Suppliers, HMRC, or yourself. This moves the problem rather than solving it, and with HMRC it adds interest and attention you would rather not have.

None of these is foolish. They are simply the options most business owners know about. There is one more, and around 58% of UK businesses have never looked beyond their main bank to find it.

The question that changes the answer

Before you borrow anything, ask one question about the money you need.

Has this money already been earned?

If you need capital to buy stock, hire ahead of a contract, or fund something you have not yet delivered, then you are asking for money you have not earned yet, and a loan is the honest instrument for that.

But if the work is finished, the invoice is raised and a solvent customer owes you the money, then you are not short of money at all. You are short of it today. That is a different situation, and it has its own answer.

What invoice finance actually does

If the term is new to you, you are in the large majority. There are around 5.7 million businesses in the UK and roughly 55,000 of them use invoice finance, which is about one in a hundred. That is not because it does not work. It is because almost nobody has heard of it.

It works like this. Rather than waiting for your customer, you draw most of the value of an invoice you have already issued. Up to 80% of the approved value, released immediately once the invoice is approved. When your customer eventually pays, the facility clears itself.

Three things follow from that, and between them they are why it suits this particular Wednesday afternoon.

• It is not borrowing. The money has already been earned, so there is no repayment schedule running alongside the problem that created it.
• Approval rests mainly on your customer’s creditworthiness rather than your own. If a large and solvent company owes you the money, that is what matters.
• Selective means you choose. One invoice, not your entire sales ledger, and nothing to pay in the months you do not use it.

Where this will not help you

It does not suit every version of this problem, and it is better to know now than after an application.

• If you sell to consumers rather than to other businesses, there is no commercial invoice to fund.
• If the customer who owes you is themselves in poor financial health, approval becomes difficult, because their ability to pay is what the funding rests on.
• Some contracts prohibit the assignment of invoices altogether. It is worth checking yours before you assume.
• If your sales are made up of a great many small invoices, the administration tends to outweigh the benefit.
• And if the shortfall is structural rather than a matter of timing, we will say so rather than fund it.

There is one more thing worth saying, because it is the part nobody selling finance tends to mention. If you are reading this on Thursday afternoon with payroll tomorrow and nothing in place, be realistic about the timetable. Funds are released immediately once a facility exists and an invoice is approved, but setting one up from nothing can take at least 48 hours from first contact. The businesses this serves best are the ones who make the call the first time it happens, and then have the facility sitting there, costing nothing, the second time.

What to do between now and Friday

• Establish whether the customer is disputing the invoice or simply slow. They are very different problems, and only one of them is about money.
• Work out the actual shortfall rather than the feared one. It is usually smaller than it feels at eleven o’clock at night.
• Check the contract for anything restricting the assignment of invoices.
• Speak to your accountant before you sign anything carrying a repayment schedule.
• If the money is genuinely earned and genuinely owed, find out what releasing it would cost before you borrow instead.

Whatever you decide, decide it on the facts rather than at speed. The pressure of a Friday deadline is precisely the condition in which businesses sign expensive agreements they would never have signed on a quiet Tuesday.