While small businesses are vital in driving progress, innovation, and job creation across the nation, the rising tide of consumer debt and the alarming increase in late payments pose a significant challenge for these enterprises, putting their financial health and their role as economic drivers at risk.

But how much of a threat are late payments to small businesses really?

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The importance of small businesses for the US economy

Small businesses are by far the most important element of U.S. economic growth, as they make up for 99.9% (33.2 million) of all businesses in America. They are the backbone of the economy, accounting for a large share of employment opportunities and GDP. 

A 2019 SBA study found that small businesses are responsible for 44% of the U.S. economy, and 99.7% of places with paid staff are companies with 500 or fewer employees (SMEs). Moreover, between 1995 to 2020, small businesses created 62% of all new jobs in the country. This means that from a total of 20.6 million jobs, 12.7 million were created by small businesses, while large corporations only created 7.9 million.

Small businesses are the engine of the U.S. economy, and late payments have become one of the most significant threats not only to their growth, but to their existence.

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Consumer Debt in the US

Graph of consumer debt in the US

Consumer debt has been on the rise, with balances reaching worryingly high levels. In 2022, consumer debt reached a staggering $16.38 trillion, compared to $15.31 trillion in 2021. This 7% increase between 2021 and 2022 is notably larger than the 5.4% jump observed between 2020 and 2021.

In 2022, the US saw an unusually sharp spike in people interested in taking out loans, specifically personal loans. These loan balances skyrocketed by an astonishing 18.3%, reaching a total of $210 billion. At the same time, credit card balances climbed by 16%, and by the fourth quarter of 2022, Americans had accumulated a massive $986 billion, just in credit card debt.

This mounting consumer debt is worrisome because it impacts not only individuals' financial well-being but also the economy at large. Small businesses rely on timely payments to remain operational and maintain their cash flow. The current state of consumer debt in the US could significantly influence these businesses and the overall economy.

The escalating amount of consumer debt in the United States poses challenges for both small businesses and individuals. As debt continues to soar, the potential ramifications for the economy become increasingly concerning. This underscores the importance of addressing this mounting issue with effective solutions.

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The effects of late payments on small businesses in numbers

Late payments have a significant impact on small businesses, creating operational challenges and hindering growth. Let's delve into some key statistics to better understand the effects of late payments on these enterprises:

  • 65% of businesses reported that they spent an alarming 14 hours per week on average completing administrative tasks related to collecting payments.
  • 89% of businesses stated that late payments were preventing them from growing.
  • 25% of businesses experienced waiting times of 20-30 days past the payment due date to receive their payments.
  • 54% of businesses anticipated that their payments would be received later than the due dates.
  • About one-third of small businesses in the U.S. declared they were at risk for closure because of late payments.

These statistics paint a concerning picture of the challenges that small businesses face as a result of late payments. Not only do they spend valuable time and resources on administrative tasks, but late payments also obstruct their ability to grow and, in some cases, threaten their very existence. Addressing this issue is crucial to ensuring the continued health and success of small businesses and, by extension, the overall economy.

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The consequences of late payments on small businesses

Small business owner dealing with late payments

Late payments can have serious consequences on the functioning and growth of small businesses. These consequences range from operational challenges to strained relationships with customers and vendors. Here are some key points highlighting the effects of late payments on small businesses:

  • Cash flow disruptions: Late payments can lead to cash flow problems, making it difficult for businesses to cover expenses like payroll, rent, and utilities. This can potentially force businesses to take on debt or cut back on essential operations.
  • Limited growth opportunities: As late payments restrict available funds, small businesses may find it challenging to invest in new opportunities, expand their product offerings, or hire additional staff, thereby stunting their growth potential.
  • Damaging relationships with customers: Late payments can negatively affect relationships with customers not only because businesses are forced to chase payments aggressively, but also because of how it dilutes the trust between both parties, as is shown in a study conducted by BusinessWire, where they found that 55% of small businesses think their clients are deliberately delaying payments.
  • Damaging relationships with vendors: Businesses that experience late payments may, in turn, struggle to pay their vendors on time, leading to strained relationships and potentially losing access to essential products and services.
  • Higher administrative costs: Managing late payments requires additional time and resources to chase unpaid invoices and perform related administrative tasks. These increased costs can divert funds and attention away from core business operations.
  • Decreased creditworthiness: Businesses that consistently experience late payments may see their creditworthiness decline, making it more difficult to secure loans or other forms of financing.

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Wrapping up

Late payments pose a significant threat to the stability and growth of small businesses, which play a critical role in driving the American economy. 

As consumer debt continues to rise, the challenges faced by small businesses due to late payments become increasingly urgent. Addressing this issue is of paramount importance, as it will not only ensure the financial health and success of small businesses but also safeguard the overall strength and resilience of the American economy.

Don't let late payments hold your business back. Leveraging AI, automation, and omnichannel communication, Arrears can help you collect payments more efficiently, allowing you to focus on what matters most – growing your business.

Visit Arrears today and take control of your cash flow.