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With a recession now upon us, you can bet there’ll be a massive increase in late and unpaid invoices. Whether you’re a consultant, digital agency owner, home contractor, event planner, or a freelancer working in the gig economy; if you run a service based business, you’re probably dealing with late payments and unpaid invoices already. 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 published report discovered late paying customers owe $50,000 or more to nearly 60% of freelance workers (Pickard).
- In a 2019 survey of 503 home contractors, 74% didn’t receive payment on a project and had to file a mechanics lien within the last year (Wolfe).
Lance Kohl, owner of PSP Compass Solutions, a marketing agency in Denver, Colorado, says that “1 out of 10 invoices I send out don’t get paid. We’re constantly spending a great deal of our time chasing after customers to get paid. The longer an invoice goes unpaid, the less likely it is that we will receive payment at all.”
Lexi Dudley and her Father Joel Dudley, owners of JL Roofing and Contracting in Canon City, Colorado revealed that in 2020 alone, they were stiffed on over 30 roof replacements totalling over $150k in revenue not received. “We spent months trying to get the homeowners to pay us and in the end we had to spend even more time and money with the courts placing liens on all those homes” said the Dudley’s.
What makes these numbers even more worrisome is that half of small businesses survive on a month-to-month basis. The average small business retains less than a month of cash reserves (Farrell and Wheat). In fact, 25% of small businesses operate with only 13 days of cash reserves. Freelancers typically are at an even greater risk. A recent survey found that 59% of freelancers in the U.S. work paycheck to paycheck (Boskamp).
With so many service business owners and gig workers living on the edge already, it’s easy to see why 82% fail because of poor cash flow management (Shinar). As the recession continues, these problems will be exacerbated. Unfortunately, late and unpaid invoices reduce a business’ cash flow, forcing business owners to reduce future investments in their business, delay hiring new employees, and cut staff hours.
So what solutions are out there for massive cash flow problems that already exist and how can you protect your business during this recession?
1. Automated Emails
There are a myriad of invoicing and payment platforms out there like Xero and Quickbooks. Many of them offer automated email systems that will automatically email customers, reminding them when their bill due date is approaching and past due. Take the time to make sure these features are active.
2. Invoice Financing
In recent years, companies like Fundbox launched invoice financing services to small businesses needing to smooth cash flow when invoice payments are late. Typically, a small business can finance up to 90% of an invoice so they may pay their staff and bills. Unfortunately, as with any loan, interest will accumulate. For instance, Fundbox fees are 4.66% for 12 week terms and 8.99% for 24 week terms.
3. Upfront Payments
Many seasoned service business owners and gig workers are wise to require payment of at least 50% of a project’s cost upfront. This strategy will protect you in the short term and make it more likely you’ll get paid in-full ultimately since the customer has already committed.
4. Build a Pipeline
In a recession, month-to-month cash flow will become even more unpredictable, so it’s important to gain commitments from customers ahead of time. Booking out 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 retainers and advances to protect their cash flow, why should your business or gig work be any different? On a recent visit to rural, Cañon City, Colorado, I discovered a company that can help: Trustio.
Just like most invoicing platforms, Trustio allows you to invoice and receive payments from your customers at any point using direct payments. However, what makes this platform awesome, is Trustio’s Protected Payment feature.
With Protected Payments, your customer pays for their project upfront. Those funds then get placed in an escrow-like account where they’re safely held between parties. Once tasks within the project are complete, 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 committed customers by providing safety to the customer and eliminating your risk of being paid late or not at all. Best of all, Trustio doesn’t charge your business for payment processing! Your client simply pays a 1% processing fee for either Direct or Protected payments.
Trustio co-founder and CEO, Brock Predovich, is no stranger to the pain of delayed and unpaid invoices. Having founded several service based businesses, Predovich has felt firsthand the harmful effects that late and unpaid invoices can have on cash flow.
“Success for any service business or gig worker is about managing cash-flow. Managing cash-flow, ultimately comes down to trust,” remarked Predovich. “You need to find good customers that you can trust will pay you on time for your hard work. To find good customers, they need to trust you too. They need to know their money is safe and the job gets 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 make sure you get paid. Late and unpaid invoices are estimated to be a $825B problem in the US alone (Shinar). If the economy continues as it has been, things could get a lot worse for contractors 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. Not implementing them could lead to your next full-time return to corporate America.
Referenced Data Sources:
Shinar
Boskamp
Farrell and Wheat
Wolfe
Pickard
Source: https://www.forbes.com/sites/joetoscano1/2022/09/08/recession-proof-your-gig-economy-cash-flow-before-things-get-worse/