With a recession upon us, you can bet there will be a massive increase in overdue and unpaid bills. Whether you’re a consultant, digital agency owner, home-based entrepreneur, event planner, or freelancer working in the gig economy; If you run a service business, you’re probably already dealing with late payments and unpaid bills. Or, statistically, you will be at some point. The numbers are staggering.
- On average, each small business has $84,000 in unpaid invoices (Shinar).
- A recently released report found that nearly 60% of self-employed people who pay late owe $50,000 or more (Pickard).
- In a 2019 survey of 503 construction contractors, 74% had not received payment for a project and had to file a mechanic’s lien in the past year (Wolfe).
Lance Kohl, owner of PSP Compass Solutions, a marketing agency in Denver, Colorado, says that “1 in 10 invoices I send out goes unpaid. We constantly spend a lot of our time chasing after customers to get paid. The longer an invoice remains unpaid, the less likely we are to receive payment.
Lexi Dudley and her father Joel Dudley, owners of JL Roofing and Contracting in Canon City, Colorado, revealed that in 2020 alone they had more than 30 roof replacements totaling more than $150,000 in uncollected revenue. “We spent months trying to get the owners to pay us and in the end we had to spend even more time and money with the courts to place liens on all these homes,” the Dudleys said. .
What makes these numbers even more worrying is that half of small businesses survive on a monthly basis. The average small business keeps less than a month of cash reserves (Farrell and Wheat). In fact, 25% of small businesses operate with just 13 days of cash reserves. Freelancers are generally at even greater risk. A recent survey found that 59% of freelancers in the United States work paycheck to paycheck (Boskamp).
With so many service business owners and construction workers already living on the edge, it’s easy to see why 82% fail due to poor cash flow management (Shinar). As the recession continues, these problems will be exacerbated. Unfortunately, late and unpaid invoices reduce a company’s cash flow, forcing business owners to reduce future investments in their business, delay hiring new employees, and cut staff hours.
So what are the solutions to the huge cash flow problems that already exist and how can you protect your business during this recession?
1. Automated Emails
There are a myriad of billing and payment platforms like Xero and Quickbooks. Many of them offer automated email systems that will automatically email customers, reminding them when their bill’s due date is approaching and overdue. Take the time to make sure these features are active.
2. Invoice financing
In recent years, companies like Fundbox have launched bill financing services for small businesses that need to smooth their cash flow when bill payments are late. Typically, a small business can finance up to 90% of an invoice in order to be able to pay its staff and its invoices. Unfortunately, as with any loan, interest accrues. For example, Fundbox charges are 4.66% for 12-week terms and 8.99% for 24-week terms.
3. Initial payments
Many service business owners and seasoned workers are wise to require payment of at least 50% of the cost of a project upfront. This strategy will protect you in the short term and increase the chances that you will be paid in full since the customer has already committed.
4. Build a pipeline
During a recession, monthly cash flows will become even more unpredictable, so it is important to secure commitments from customers in advance. Booking partially or fully committed customers weeks or months in advance will help you manage your cash flow more efficiently.
5. An Escrow-like system
Lawyers commonly use deposits and advances to protect their cash, why should your business or job be any different? During a recent visit to rural Cañon City, Colorado, I discovered a company that can help: Trustio.
Like most billing platforms, Trustio allows you to bill and receive payments from your customers at any time using direct payments. However, what makes this platform great is Trustio’s protected payment feature.
With Protected Payments, your client pays for their project in advance. These funds are then placed in an escrow account where they are kept securely between the parties. Once the project tasks are completed, the payment is released immediately and sent directly to the service provider’s bank account. The protected payment option allows a contractor to build a pipeline of engaged customers by ensuring customer security and eliminating the risk of being paid late or not at all. Best of all, Trustio doesn’t charge your business for payment processing! Your customer simply pays a 1% processing fee for direct or protected payments.
Trustio co-founder and CEO Brock Predovich is no stranger to the pain of delayed and unpaid bills. Having founded several service companies, Predovich has experienced firsthand the detrimental effects late and unpaid invoices can have on cash flow.
“The success of any service business or gig worker depends on cash flow management. Cash flow management ultimately comes down to trust,” Predovich noted. “You need to find good clients that you can trust and who will pay you on time for your hard work. To find good customers, they must also trust you. They need to know that their money is safe and the job is done.
Protect your payments
With the recession in full swing, it’s more important than ever to reevaluate the systems you use to manage your cash flow and ensure you get paid. Overdue and unpaid bills are estimated to be an $825 billion problem in the United States alone (Shinar). If the economy continues as it has, things could get worse for entrepreneurs and small business owners. Implementing the five strategies above won’t guarantee your success, but can at least help you take steps to protect your business during the recession. Failure to implement them could lead to your next full-time return to corporate America.
Referenced data sources:
Farrell and Wheat