Small businesses need quicker payments to survive

According to research done by US Bank, 82% of failed US businesses collapse for the same reason: insufficient cashflow. Big businesses often do not pay smaller suppliers quickly enough, with many insisting on 90-day payment terms. This leaves already vulnerable businesses in even more precarious positions, stretching cashflow unsustainably.

In the UK, on average, small and medium-sized enterprises (SMEs) wait 54.1 days to get paid. “It is clear [that] poor payment practice remains a pressing issue and it is the smaller businesses that are affected the most,” says Matthew Davies, director of commercial finance at UK Finance. 

A number of these invoices are not paid on time. “Late payments are currently affecting half of our members,” comments Tina McKenzie, policy chair of the Federation of Small Businesses. This leads to the “closure of 50,000 small UK businesses each year”. Today, three in five UK businesses are suffering from late invoices, according to research from Barclays Bank. The average UK firm is owed £147,000, according to research from PwC.

A culture of late payments

The problem has become so systemic that UK business secretary Grant Shapps recently launched a review into the “exploitative” culture. He commented: “That many small firms are routinely paid late is intolerable and presents a real barrier to productivity, the creation of high-skilled jobs and ultimately economic growth.”

Although many big retailers publicly agreed to join the Prompt Payment Code, supermarkets like Tesco and Walmart still pay suppliers up to 90 days after receiving goods.

Lynne Darcey Quigley, founder and CEO of Know-It, which supplies credit control software for SMEs, has been in the SME lending world for 27 years. She has seen first-hand how late payments have become what she calls “normalised”. “It makes no difference whether people pay on time,” she says. “There’s no stigma attached to it anymore.” 

Rebecca Neophytou, co-founder of NumberGeek, which serves the digital and creative industries, also sees how small suppliers grapple with rigid payment terms. “[Bigger companies] have processes,” she sighs. “Purchase orders they must match, and payment runs. Some companies only make a payment on a certain day of the month.” 

This cash squeeze makes it difficult for small businesses to operate efficiently. “You have to make that decision about who you’re going to pay,” continues Ms Neophytou. “Some have staff, office rent, tax, bills, and other suppliers … it’s a whole knock-on effect.” 

Many will turn to debt to survive. “More than one in three applications for finance by small businesses in the second quarter were made to manage cashflow,” reveals Ms McKenzie. 

But with high APRs, this is not an ideal solution. “I’ve had clients who’ve had to wind their business up,” says Nasri El-Sayegh, vice president for revenue at Hokodo, a buy now pay later firm. “It was more expensive to borrow the money than to continue operating.” 

Invoice support needed

Over the past year, investment in the business-to-business fintech space grew to more than $14.1bn in Europe.    

According to Nick Ogden, chairman of Funding Options and founder of WorldPay and ClearBank, solutions to the SME issue exist. “There’s no reason why a big UK clearer couldn’t partner up with a challenger bank,” he suggests. “There’s enough intelligence now and digital capability to come up with an even better solution.” 

Many small business owners do not see support coming from incumbent banks, which seem less supportive. According to a recent consumer confidence survey from Capify, around 52% of small businesses believe high street banks would not offer them a loan. 

Some banks, such as NatWest, do provide invoice financing, but only for companies with turnovers of at least £300,000. This cuts out many small businesses and most micro businesses. Meanwhile, other banks such as Barclays offer invoice financing with APRs of around 10%.