If your business has the ability to pay, it means that you have enough cash to cover your costs. Being able to cover costs is the sign of a healthy business.
Ability to pay is sometimes called solvency or liquidity. Solvency usually refers to your ability to cover long-term costs, while liquidity is used for short-term costs. It’s a good idea to set up a cash flow forecast to ensure that you have enough money coming into your business.
Businesses without the ability to pay might end up with debt collection claims, and, in the worst case scenario, having to declare bankruptcy.
Payment ability is a challenge, especially for new businesses
It can be expensive to start a business, and many businesses struggle with their payment ability at the start. In fact, in the US 21.9 % of businesses fail within the first year, and 82 % said it was due to cash flow problems.
You should make sure to set up a budget for your business, so you know that you can cover your expenses at the start.
Ways to improve ability to pay
The best way to improve your ability to pay is to make sure to get paid for the product and services you sell. You should invoice your clients as soon as you’ve done a job or sold something. Invoicing quickly is one of 7 things you can do to get paid fast.
You can also look into other solutions, such as taking up a loan, getting investors, or looking into invoice finance or invoice factoring. This is when you ‘sell’ your unpaid invoices to a bank or factoring company. They pay you the invoice sum and charge you a small fee.
Being paid fast can improve your ability to pay your suppliers and cover your loans.
