SMEs need more guidance to prepare for inevitable late payments

Jon Hughes - Independent Growth Finance
18th December 2019
Jon Hughes Independent Growth Finance
"With so much economic uncertainty on the horizon, businesses will need to adapt to sudden changes and challenges. Resulting in a greater need for quick flexible funding."

Over the years, a culture of late payments has ingrained itself as ‘acceptable practice’ amongst many large businesses.

By delaying payment of SME supplier invoices, companies are giving themselves the cheapest form of capital and the biggest cash flow advantage. They are using SMEs as an interest-free loan provider, which, in some cases, is proving fatal.

Cash flow is king

Cash flow difficulties are one of the biggest SME killers in the UK. Late payments remain one of the biggest thorns in the side of the economy, costing SMEs £23.4 billion according to Pay.UK. Over three quarters (78%) say they are being forced to wait a month, or longer, beyond agreed payment terms before being paid, putting otherwise successful SMEs at risk. There is widespread consensus that more needs to be done to tackle this ongoing issue.

The true cost of late payments

Late payments have a knock-on effect that goes way beyond money. Chasing outstanding debts impacts on time that should be spent focusing on running - and growing - a business. SME owners may have to restrict their own or their employees’ salaries, reducing morale and impacting staff retention. While the strain of poor cash flow often affects mental health. Late payments cause mental health issues for 90% of bosses in the construction sector, according to engineering services trade bodies BESA and ECA.

For SMEs in particular, business is as much about relationships as it is money, and many don’t want to rock the boat demanding immediate payment or compensation. SMEs are instead taking control of their own financial future. Turning to experts to provide them with the tools and expertise to plan for cash flow problems arising from late payments.

Failing to prepare is preparing to fail

Late payments cannot be timed or predicted, but by now they should be anticipated. Quality advice is essential for well-informed and timely decisions amongst business leaders. IGF’s recent Powering Freedom Report found that financial advisers (28%) have overtaken banks (27%) to become the top source to learn about available funding options. The key to weathering periods of poor cash flow, with minimal impact is for business leaders to work closely with advisers. Financial advisers will then work with clients to anticipate problems before they happen, ensuring they are clear on the funding routes available to them.

Certainty, speed and flexibility key in an uncertain economy

While one in twelve (8%) businesses have secured funding in less than seven days, more than one in seven (14%) have waited five months or more. This inconsistency that surrounds securing funding is becoming an increasing red flag for SMEs, as it inhibits the ability to plan. While traditional bank funding remains the primary lending source for many organisations, more than a quarter (27%) opt for more flexible invoice discounting or asset based lending.

Dave Edwards, Partner FRP Advisory, said, “We speak with more and more businesses that want to work with lenders who can provide clear, flexible, and committed funding solutions, whether this be sector expertise or the mutual understanding for the specific needs of the client.”

Pryme Group, a provider of integrated manufacturing solutions, is one of those businesses. Kerrie Murray, CFO, explained, “We work with key partners in the alternative finance space so we can be nimbler. Independent Growth Finance is our biggest lender, which makes the decision-making process simpler and less time consuming. It also allows us to be confident that our budget and plans provide sufficient flexibility to react to external developments if and when they unfold.”

Asset based finance on the rise

With so much economic uncertainty on the horizon, businesses will need to adapt to sudden changes and challenges. Resulting in a greater need for quick flexible funding.

An experienced financial adviser will be able to assess very quickly what a businesses’ funding options are. At IGF we believe that it is essential to get deals in front of the decision makers within 48 hours. We can’t say yes to everything, but, if we can’t say yes, we will say no quickly. This approach comes down to genuine empathy for British business owners.

IGF has seen no shortage or lapse in demand for funding. Our funding provision has grown 39% compared to the 2017/18 financial year, which in July meant we hit £100 million client funds in use.

There is no doubt that 2020 and beyond will remain challenging for SMEs. Business leaders will continue to lay awake at night, however that isn’t going to stop them looking ahead and being determined to take control of their future. It’s in all our interests that they have access to the right financial support to help make it a reality.

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