Nonrecurring payments to infrequent service provider and independent contractors are a fact of life for small- and medium-sized businesses (SMBs), but they also present a payments problem.
With an average of 72 ad hoc transactions from some 15 different buyers annually, these payments represent a staggering $1.2 trillion of outstanding receivables for SMBs.
According to “Fixing Small Business Payments: How Instant Payments Help Buyers Solve The Ad Hoc Payments Problem,” a PYMNTS and Ingo Money collaboration, 36% of those receivables ($456 billion) are paid late, with 60% of late by one month or longer.
It’s a payables problem that recovering SMBs can scarcely afford.
As the study states, “Ad hoc payments may generate a considerable amount of revenue, but that means they also can have a detrimental impact on their financial health when they are received late — and this is a common problem.”
PYMNTS found that 30% of all ad hoc vendor payments received by SMBs receive hit the books after contractual due dates have passed. “This means that, at any given time, U.S. SMBs collectively have $360 billion tied up in [accounts receivable],” the study notes.
Get the study: Fixing Small Business Payments
Diagnosing the Problem
Looking at the most common sources of ad hoc payments can help SMBs devise strategies for dealing with late payments.
Topping the ad hoc payment list for SMBs are invoices for products and services sold to other businesses, with 21% of all ad hoc vendor payments received in 2020 being B2B payments.
“Invoices for freelance contract and consulting projects are the second-most common type of ad hoc payments that U.S. SMBs receive,” the study states, with 22% of SMBs recording at least one ad hoc freelance, contract and consulting payment in 2020.
Additionally, 17% of all U.S. SMBs “report having received at least one payment for products or services sold via business-to-consumer (B2C) digital marketplaces in 2020.”
Commissions were paid late 34% of the time in 2020, with B2B marketplace payments being a close second, representing 33% of late payments received by SMBs last year.
Of this mountain of $1.18 trillion in receivables, 12% is typically paid to SMBs two weeks after the due date, “and as much as 18% is received one month or more after the due date,” creating perilous cash flow problems for businesses that can least afford it.
Read the study: Fixing Small Business Payments
Over Half of SMBs Will Pay to Get Paid Faster
To remedy the situation, more businesses are eyeing instant and emerging real-time payments.
According to the study, “Instant payments can be an attractive payment option for SMBs looking to put their ad hoc payments on the books as quickly as possible,” with research showing that 75% of SMBs in the U.S. are “very” or “extremely” likely to maintain relationships with buyers that offer free instant payments options — the highest interest shown in any payment option.
With 54% of all SMBs saying they would be “very” or “extremely” likely to pay fees for instant ad hoc vendor payments, it’s a hot opportunity for SMBs and solution providers alike.
SMBs “often have little recourse other than to offer their buyers discounts for paying on time,” which the study noted is only marginally effective, and “instant payments stand out as a key service buyers can implement to help alleviate their SMB receivers’ late payment problems.”
See the study: Fixing Small Business Payments