Tackling late payments in an uncertain business landscape

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By Tim Vine, Head of European Trade Credit, Dun & Bradstreet UK

Without question, the past two years have seen significant changes across the political and economic landscape, which have had a ripple effect across the globe. In 2016, two historic and monumental votes in modern history occurred – the vote for the UK to leave the European Union, and the US Presidential election of Donald Trump. Since then, and quite understandably, the UK has been experiencing a period of uncertainty, with fluctuating economic growth and interest rate rises tied heavily to Britain’s Brexit negotiations with the EU.

This uncertainty has affected the confidence of businesses of all sizes, but small and medium enterprises are often the most vulnerable. In addition to lack of clarity over Brexit, UK SMEs face managing the impact of late payments from suppliers and securing funding for investment. Despite these challenges, Britain’s SMEs remain as confident as ever that the UK is a great place to start a small business with more new businesses being registered than ever before.

When we recently surveyed a group of UK SME owners, although they remain focused on attracting new customers, it’s clear there has also been a significant drop in confidence in the economy. We found 35% of SMEs have cancelled or postponed plans as a result of the Brexit vote and a further 34% admitted that they have rewritten their business plan in response to the ongoing economic and political uncertainty.

But Brexit isn’t the only obstacle SMEs are currently experiencing. In such a financially fragile environment, financing is proving increasingly problematic, as well as the cash flow impact of late or unpaid invoices.

Smaller businesses are often more dependent on prompt payments from larger firms for their cash flow and financial success. Over a quarter (26%) of SMEs we spoke to highlighted timely payments as the most critical factor for their future financial success. And for 58% of the small business owners, late payments are putting their businesses at a very real risk of failure. What’s more, outstanding payments average £63,881 at any one time and one in ten have even used their personal finance to prop up the business, which is untenable in the longer term.

The problem of late payments is growing, with more than half (51%) of SMEs saying this issue is more of a problem than three years ago, and 58% going so far as to say it’s putting their business at risk of failure.

So what can SMEs do to mitigate the risk?

Looking at the past payment behaviour of potential customers and assessing their creditworthiness prior to agreeing credit terms is the best way to limit future risk. Most SMEs don’t have the luxury of turning away business, but even understanding likely behaviours can help to manage cash flow and plan ahead.

Tracking the financial health of the existing customer base is also important. Even if credit checks were not completed before onboarding a new customer, the customer’s credit history can still be assessed and any changes flagged or tracked. Having this information readily at hand can help to mitigate the impact of late payments by predicting when cash may be squeezed.

When it’s not possible to predict late payments, cash flow can be bolstered by alternative sources of finance. Whereas factoring and asset-based lending were historically the domain of medium and large organisations, the doors are opening to smaller businesses. Single-invoice financing can provide a much-needed option when cash flow is tight, and is well worth investigating.

SMEs make up 99% of UK businesses, and their success is critical to the future of our economy. Access to the right information, the right sources of funding, and the right technology can help SMEs fully realise their ambitions and ensure a strong and fruitful future.

  • Research from The Prompt Payment Directory also shows that >40% of SMEs have had to take out a bank loan to cover shortfalls due to late payment.

    The personal impact is high too. 29% of SME owners struggle with anxiety, depression and other issues brought about due to the stress caused by late payment.

    The self employed and small business owners need to be supported but they also need to help themselves in tackling this problem.

    “Understanding likely behaviours” in respect of invoice payment by customers is vital to managing cash flow and making critical business decisions in advance of committing to new contracts. It doesn’t make sense to risk a company for want of due diligence.

    In the internet age sharing this kind of information (anonymously in some cases) is also the increasingly normal way to solve these kinds of entrenched problems.