Payment ability refers to the ability to handle ongoing costs at any given time. This requires that the individual or company has access to sufficient cash in the bank account.
Companies with poor or no payment ability may eventually face consequences such as legal collection through debt collection, or in the worst case, bankruptcy.
Payment ability is also often referred to as liquidity, which means the amount of liquid funds one has access to meet financial obligations. To improve predictability in payment ability, many companies choose to set up a liquidity budget.
Payment ability is a challenge especially for new companies
Many companies struggle with payment ability in the start-up phase because there are many costs associated with being a new business.
Although it is possible to use in-kind contributions as share capital to start (i.e. the value of things instead of pure cash), we recommend starting with cash only, precisely because costs during start-up can quickly become too much.
In such cases, companies can choose to use solutions such as invoice sales or factoring, where a credit institution or bank advances payment for invoices the company has sent out. This can significantly improve companies’ payment ability.