Payment delinquency is hurting your business more than you think

In fact, meeting payments consistently will have a lasting impact for your business.

Your company exists in a network, and having good ethics will help you to grow that network. Photo by Margarida CSilva.

Payment delinquency is a recurring issue across various industries. Payment delinquency occurs when a payer is late or overdue on a payment, and the long-drawn battle and complications of money settlement affects all involved parties.

In the construction industry, it is common to hear of late payments taking up to 90 days to pay off. Sometimes, companies simply accept that they will have to wait indefinitely for payment to come in. Late payments have been so severe that it has caused the downfall of many companies.

Delinquency can also be magnified by poor or slowing economic prospects. According to the Singapore Commercial Credit Bureau, slow payments in the country hit a new five-year high in 2016 at 44.71 percent, while prompt payments fell to a five-year low at 43.77 percent. For the whole of 2016, prompt payments accounted for less than half the total payment transactions while slow payments made up more than two-fifths of all transactions.

The report also added that “[t]he construction sector, hit by the property market slowdown, registered the highest proportion of slow payments for the fourth consecutive quarter, due largely to bad debts by firms within the heavy construction sub-sector.”

So how is payment delinquency bad for business?

It hinders the ability to plan ahead

In industries where work is projects-based, such as in architecture, construction, events management (to name a few), managing project cycles is a critical aspect of their business. A company manages various resources, and is always striving to fully utilise these resources at any given point in time, such as:

  • Manpower
  • Equipment
  • Finance

Just like how a taxi rental company would strive to rent out its entire fleet of cars so to earn maximum revenue, a construction company also seeks to fully utilise its manpower and machinery fleet in order to maximise revenue.

Payment delinquency restricts a company’s finances, which can affect their opportunities to tender for other projects. These missed opportunities can add up in the long run and determine whether a company barely pulls through or makes good profit in the financial year.

Globally, the construction sector is notorious for having a lack of productivity improvement over the years. According to a McKinsey report, construction is not only one of the least digitised sectors in the world, global labour-productivity growth in construction has averaged only 1 percent a year over the past two decades (compared with growth of 2.8 percent for the total world economy and 3.6 percent in the case of manufacturing).

By inculcating a culture of timely payments in the sector, companies will be empowered to utilise all of its resources more efficiently, thereby boosting overall business productivity.

It harms your business network

Payment delinquency is often perceived to be embedded in some of the older, more traditional sectors, such as construction or logistics. Disruptions further up the chain often create delays that ripple downwards, impacting many others to a greater degree.

A main contractor may delay payment to its subcontractor for one month, however this could cause a sub-sub-sub contractor to only receive payments six months later. Ultimately, the entire industry suffers.

Some may claim that it is part and parcel of the business, and that it is hard to eradicate this problem completely. However, this also comes off as a weak excuse for poor business ethics. Understanding that the companies subcontracted under your company are dependent on you to provide them with work and payment, it is unacceptable to expect timely work without timely payment. You have failed to safeguard the interests of those companies under you.

Building a strong and lasting brand is partly about creating a strong and trusting network of companies, and payment delinquency damages that trust. Nobody wants to work with a company that is consistently late on payments. On the other hand, everybody wants to work with a company that is timely in its payments.

Common counterarguments downplaying the problem

“But only the small businesses suffer from payment delinquency!”

That is precisely why taking a stand against payment delinquency and ensuring timely payments for all of your subcontractors will make your projects all the more desirable. It could even open up new opportunities and build stronger business relationships in the long run, which will be beneficial for your business as well.

“Only when times are hard, do businesses take a longer time to pay up. Otherwise payment delinquency is a manageable issue.”

When times are hard, the entire industry suffers. Prolonged economic hardship could even cause the industry to shrink. Embracing new payment solutions that ensure timely payment could provide your immediate business network with an additional layer of financial certainty that other businesses in the industry will not have access to. Wouldn’t this be to your company’s immense advantage?

What can we do about payment delinquency?

Net30, a US-based startup under Y Combinator, is striving to solve this problem of payment delinquency. The platform allows construction companies to handle invoices and make online payments directly to contractors’ bank accounts. This digitizes a process that is still mostly paper-based. Construction projects can involve dozens of subcontractors, and the platform hopes to speed up the entire payment process so that all parties can receive timely payments with minimal disruptions to the project timeline.

Entrepreneurial projects such as Net30 demonstrate new possibilities, through technology, for companies to embrace. Such systems provide transparency for all parties involved, so that they know exactly how payment will work out, and who should be accountable when payment deadlines are not met.

Ultimately, ensuring timely payments is a matter of business ethics, and it is an admirable trait that will earn you the respect and trust of your business partners. Even without the luxury of technological solutions, recognising that timely payments is beneficial to your company’s long-term growth will guide future decisions.

After all, ethical business is good business.
Photo by rawpixel.

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