How fintechs can help businesses deal with late payments
As the recession threatens, many businesses are struggling to balance the books. Add to that the ongoing challenge of late payments – and it’s a recipe for financial disaster.
Fast growing companies are also at risk – they scale 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 don’t get paid on time. This includes everything from hiring new employees to paying sky-high electricity bills in a larger warehouse.
The financial pressure is increasing 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 2 million, of the UK’s growing businesses have less than three months of cash left to support their operations. About 10% – or 200,000 of those 2m – are in “serious trouble” and a further 300,000 “only have weeks to go”.
Businesses are also crippled by astronomical costs, with factory 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 day-to-day operations – has risen, along with late payments. Research from PwC found that Days Sales Outstanding (DSO) – the length of time invoices are due – hit a five-year high in the past 12 months, rising to almost eight weeks (54.1 days), up 7% annually.
The global economy is facing a recession, which is having a negative impact on small and medium-sized businesses. The number of SME insolvencies has increased – particularly in the UK – as firms struggle to get paid by customers.
Support for payments during the holiday season
Against this backdrop, we enter the festive season – where business owners who depend on this time for the bulk of their sales will be hit with extra stress. With the Christmas season fast approaching, industries that typically see an increase in demand — from florists and toy stores to liquor and alcohol — will need extra cash to handle the demand — from hiring extra holiday workers to increasing supply. If the additional working capital does not come through – and customer invoices remain unpaid, companies risk having to reduce production – limiting sales growth and further reducing the chance of financial survival.
What is the solution?
Alternative financing for SMEs
For businesses that thrive during the holiday season, it’s worth thinking about your company’s cash flow and planning before problems stemming from the above problems arise – because they will already be compounded by the burden of late payments.
Many are turning to banks for help – but due to regulatory constraints, very few can provide the level of liquidity required during this critical period. To overcome such challenges, many SMEs are working 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 banking app for small businesses that aims to ease the burden of chasing down overdue invoices. The Revenue app allows TSB’s business customers 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 handling and free business owners from time-consuming financial administration.
Other options are digital banks such as Monzo, which allow companies to apply for loans through their app and, once approved, receive the funds in their account within minutes.
Peer-to-peer lending is another option. These are platforms where lenders lend money to businesses for a fixed return over a certain period of time. Businesses with low credit scores still qualify – which is great – and interest rates on loans are usually lower than those offered by banks. However, there is still risk with this approach, namely the fact that business owners must provide a personal guarantee against the funds they wish to borrow. If you don’t keep up with payments, any assets you put up as collateral – like a house or a car – could be put at risk. A personal guarantee can mean that your assets, including personal property, can be put at risk if you don’t keep up repayments on your finances.
One of the most popular options is Invoice financing. This is a financing option that allows business owners to receive payment for outstanding accounts receivable.
In other words, an invoice finance company finances a percentage amount a supplier owes on an invoice. When the customer pays the invoice, the business pays a small percentage of the invoice amount back to the financier (the Invoice Finance company) as a loan. This presents much-needed working capital that can help businesses overcome existing cash flow obstacles.
When a business is growing rapidly and demand is high, it is important that solvable problems such as cash flow barriers do not get in the way. With fintech options like Invoice Financing, late payments and the spike in business during the holiday season become more of an opportunity for expansion as opposed to a headache. It’s a winning approach that ensures cash flow doesn’t get in the way of success—and it’s definitely worth a toast.
About the author: Ian Duffy is CEO of Accelerated Payments, which provides funding 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.
