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To improve cash flow, more small business owners are adopting digital payments during the pandemic

Posted by Grace Townsley

August 11, 2021    |     3-minute read (692 words)

In a recent survey released by Wave, an H&R Block company, 17% of microbusiness owners have sent out invoices that were never paid. For these microbusinesses, companies with fewer than nine employees, the backlog of unpaid invoices can be crippling. Nearly 30% of these business owners have had to borrow from their own personal funds to cover business costs, and nearly 20% have been forced to shrink or forgo their own paycheck just to cover the loss of payments. 

The pandemic’s impact on delayed invoice payments

The pandemic has made receiving invoice payments on time even more difficult for many of these microbusinesses. Particularly, fear of COVID transmission has hurt the 70% of microbusinesses that rely on paper checks or cash as their main form of payment. Because cash and paper checks often require the two parties to be in close contact, many customers are reluctant to meet and make their payment. 

Service-based businesses, where payment is usually requested after service has been rendered, are at a higher risk of holding unpaid invoices. Common customer nonpayment excuses include claiming to forget their invoice was due, that they lost the invoice, or that they simply couldn’t afford to make the payment. Regardless of the reason, business owners who are unable to follow up on every outstanding invoice risk significant loss of income when they invoice after services are rendered.

Cash flow concerns slow down many micro and small businesses

The biggest consequence of the rise in late payments due to the pandemic is how it cramps cash flow for these fragile businesses. About 45% of business owners in the Wave survey report cash flow being a major challenge for their business. When these businesses don’t receive timely payment, not only are they unable to cover the cost of materials and overhead that went into the sold product or service, but they also can’t secure materials or labor for their next sale. Sluggish cash flow can quickly shutter a microbusiness. 

Accepting digital payments offers a major layer of protection

If you’re a microbusiness or small business owner, how can you protect yourself from this kind of significant revenue loss? Accepting digital payments can go a long way in securing payment faster and reducing physical contact. Plus, as of 2021, 4 out of 5 consumers expect to be given a digital or contactless payment option. Businesses that are equipped to accept nontraditional payments will continue to have an advantage among consumers.

Digital payment options like Venmo, PayPal, Apple Pay, Square, Stripe, QuickBooks and others are on the rise. In a report by the National Retail Federation, contactless payment options like these have increased in popularity by nearly 70% since January 2020. And these contactless and digital payment options come with numerous benefits, including quicker payment and safer transactions. 

Businesses that offer digital payment options tend to see their invoices paid more quickly, as the customer can pay the invoice online or on their phone instantly. The funds transfer into the business’s account sooner than a traditionally deposited check, which can take up to 14 days to be verified. This allows the business to pay their employees sooner. When a business can pay their suppliers sooner, they may also have the opportunity to negotiate a better deal and save even more upfront costs. 

Digital payment options save time and can save $$$

Without the need to chase invoices, track paper checks and drop off cash deposits to the bank, microbusinesses can save significant time and paperwork. Digital payments increase the likelihood of receiving invoice payments and help protect against human error and cash theft. 

While cash and check deposits are free, digital payments can come with a 1.3% to 3.5% processing fee. For many microbusinesses, the time savings, increased invoice payment rate and market advantage offered by digital payments can offset those costs. As with any major functionality change, business owners considering switching to or adding the option of digital payments should carefully weigh the costs and benefits of adopting a new payment system. But as the pandemic lingers, the rise in digital payments will undoubtedly continue. 

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