As recession looms many businesses are struggling to balance the books. Add to the mix the ongoing challenge of late payments – and it’s a recipe for financial disaster.
Fast-growing companies are also at risk – they are scaling so quickly but can’t get the money they need to pay for the things that will take them to the next stage of success because they aren’t being paid on time. This includes anything from hiring new employees to paying soaring utility bills in a bigger warehouse.
Financial pressures soar as the cost-of-living crisis continues
Times are tough on all fronts. Recent findings from the Office for National Statistics reveal that 40%, or 2m, of the UK’s growing businesses, have less than three months’ worth of cash left to support their operations. About 10% – or 200,000 of those 2m – are in “serious trouble”, and another 300,000 “have only got weeks left”.
Companies are also crippled by astronomical costs, with factory input prices increasing by 18.6% in 2022, a record high.
Since the pandemic, the amount of cash tied up in working capital – the cash businesses need to run daily operations – has soared, along with late payments. Research from PwC found that Days Sales Outstanding (DSO) – the length for invoices to be paid – reached a five-year-high, in the last 12 months, increasing to almost eight weeks (54.1 days), up by 7% annually.
The global economy is facing a recession, which is having an adverse impact on small and mid-sized businesses. The number of SME insolvencies has spiked – especially in the UK – as firms struggle to get paid by clients.
Support for payments during the festive period
Against this backdrop we enter the festive period – where business owners who are dependent on this time for their bulk of sales will be hit with additional stress. With Christmas season fast approaching, industries that usually see a spike in demand – from florists and toy shops to spirits and alcohol will need extra cash to manage the burst of demand – from hiring extra holiday staff to increasing supplies of goods. If the extra working capital doesn’t come through – and client invoices remain unpaid, then companies risk having to decrease production – limiting their sales growth and further reduce their chance for economic survival.
What is the solution?
Alternative finance for SMEs
For businesses that thrive during the festive season, it’s worth thinking about company cash flow and planning ahead before problems stemming from the above issues arise – because they will already be compounded by the burden of late payments.
Many turn to banks for help – but due to regulatory constraints, very few can provide the level of liquidity that is required during this critical period. To overcome such challenges, many SMEs work with FinTechs to deliver their services to a wider audience. A good example of this is Manchester based fintech Bankifi, which partnered with TSB bank to launch a small business banking app which aims to ease the burden of chasing overdue invoices. The Revenue app allows TSB’s business clients to collect customer payments from requests sent via SMS, WhatsApp, email and QR code. In addition, the app connects to existing accounting software to streamline invoice management and liberate business owners from time-consuming financial admin.
Other alternatives are digital banks like Monzo, which allow companies to apply for loans through their app, and once approved, receive the funds into their account in minutes.
Peer-to-peer lending is another option. These are platforms where lenders loan money to businesses for a fixed return over a certain time. Businesses with low credit scores still qualify – which is great – and interest rates on loans are usually lower than those offered by banks. There are still risks to this approach, however, namely the fact that business owners need to put down a personal guarantee against the funds they want to borrow. If you don’t keep with payments, any assets you put forward as your guarantee – like a house or car, can be put at risk. A personal guarantee can mean that your assets, including personal assets, can be put at risk if you don’t keep up repayments on your finance.
One of the most popular alternatives is Invoice Financing. This is a financing option that allows business owners to receive payment for outstanding accounts-receivable invoices.
In other words, an invoice financing company funds a percentage amount a supplier is owed on an invoice. When the client pays the invoice, the business then pays a small percentage of the invoice amount back to the funder (Invoice Finance company) as a borrowing. This presents much needed working capital which can help businesses to overcome existing cash flow hurdles.
When a business is growing fast and demand is high, it’s important that solvable issues like cashflow barriers don’t get in the way. With fintech alternatives like Invoice Financing, late payments and the spike in business during the festive season becomes more of an opportunity for expansion as opposed to a headache. It’s a winning approach that ensures that cashflow doesn’t get in the way of success – and that is definitely worth a toast.
About the author: Ian Duffy is the CEO of Accelerated Payments, which provides finance to businesses with an immediate need for working capital to fund new opportunities for growth or keep the show on the road while they wait to get paid.