Payment delays are among the most significant inhibitors to positive cash flow and growth for many businesses. A 2014 study of worldwide payment behaviors by Euler Hermes found that in general, the total number of late payments has increased. But some industries are more likely to be late in paying their bills than others. But which are the industries most prone to late payments? And does the industry you’re in, or work with, play a role in your likelihood of dealing with late paying customers? Absolutely, says Hermes. Here’s a rundown of which industries are most prone to late-paying customers, and how you can help give customers a friendly push towards prompt payment.
Industries Most Prone To Late Payments
- Energy & Utility Industries
- Agricultural Industry
- Commodities Industry
- Electronics Industry
- Food Service Industry
- Construction Industry
- Freelance & Creative Industries
According to Hermes’ study, the energy utility industry had the biggest late-payment problem, both in total dollar amount owed and in the number of outstanding accounts. Commodities (basic resources and agricultural) was the second most at-risk industry, followed closely by automotive and retail.
The study predicted that retail, energy, and auto would soon take a turn for the better in terms of on-time payments. However, electronics, food, metals, chemicals, and commodities were forecasted to see an increase in payment problems in the near future. Hermes offers a helpful infographic of the 2014 study here.
Of the industries most prone to late payments, none have more consistent problems than the construction industry. Their late and non-payment problems stem from the large scope and overall price of their projects. According to a study by credit reference agency, Graydon, the construction industry, 53% saw late payments as a “significant problem” compared with around 20% of those in other sectors including retailers, distributors and restaurant owners. 31% of construction companies said that they had “almost gone out of business” as a result of late payments, compared with 19% of manufacturers and 5% of retailers.
Freelancers and other creative professionals are also one of the industries most prone to late payments and non-payment. Their work is often handed over before payment is made, and projects are frequently canceled before completion, though significant work may have already begun (similar to construction and contracting businesses). Creative projects can be subject to customer opinions and preferences- which mean they frequently feel they do not have to pay if they do not like the final result. About 40% of freelancers had trouble getting paid in 2009, according to a survey released in mid-April by the New York-based Freelancers Union
A Surprising Culprit: B2B Clients
You might expect that B2B clients would be prompt about payment—after all, they should understand how crucial timely payment is to a company’s cash flow—but, in fact, they are part of the problem. Another Euler Hermes study done in June 2015 found that B2B companies generally report the highest days sales outstanding (DSO) figures (i.e., the longest period invoices go unpaid) of all industries surveyed. The September 2014 Atradius Payment Practices Barometer found that 42.5% of B2B invoices in the United States were paid late, with 5.6% still unpaid by the 90-day mark. That’s a lot of late payments—nearly half of all B2B invoices. Insufficient cash flow on the client’s end and inefficient/inconvenient billing systems were the top two reasons given for paying late.
And if you’re a B2B company waiting endlessly for payments from a larger corporation, it turns out you’re not alone. Payments seem to get delayed even longer when there’s a size difference between the two companies.
The Wall Street Journal reported in 2012 that “businesses are waiting longer for commercial customers to pay their bills as many big companies continue to hoard cash to bolster their own working capital. […] Many business owners say they’re seeing payments from larger customers stretch from 30 days to 60 and even 90 days after an invoice is issued. The longer wait is taking its toll on the companies, which often have to borrow at costly rates to fill gaps in their cash flow between payments.” And, according to the New York Times, the problem is getting worse, not better, with some big companies pushing for payment periods as long as 120 days.
How to Tighten Up Payment Timelines
Late payment issues are compounding, one client’s late payment cause cause the original business to be late paying their bills- and so on. Invoicing clients promptly and politely, keeping payment periods short (say, two weeks rather than a month), and sending regular payment reminders and follow-ups are all easy, effective ways to get payments on track. The most effective method for encouraging on time payments, and successfully collecting on late payments, is to use an AR management platform like the FG Receivables Manager.
How have you seen payment behavior trends change over time in your industry, and what steps have you taken to speed up payment turnaround? Share your progress with us in the comments below!