Late payments on the dot – how to change the game for SMEs

Cash flow is certainly essential to a successful business. Without a continuous flow of money coming in everything from salaries, rent, business rates, licences and insurance, to utility bills and maintenance fees could all be missed. Late payments by customers also have a domino effect on a company’s suppliers, and a lack of positive cash flow can stifle expansion plans.

The standard 60-day payment terms that many companies apply allow some flexibility for businesses to pay their suppliers, but what if their own customers delay payment past the usual terms, leaving the business with no funds to pay those suppliers on time? The knock-on effect of late payment can be significant and devastating.

A recent US study by Intuit found that almost two thirds (61%) of global small businesses struggle to manage cash flow – 42% within the last year alone. For 32% this is causing problems with paying multiple business costs, and 43% of respondents confirmed that they are regularly at risk of not being able to pay wages on time. 69% of the 3,000 small business owners involved in the study reported being kept up at night due to worries over cash flow.

Counting the cost of poor cash flow

The study also revealed that liquidity problems are causing businesses to lose money. On average, US small businesses lose USD 43,394 (~GBP 33,700) per year because they do not have the cash flow to take on certain projects or sales. More than half of US (52%) and UK (51%) businesses have lost USD 10,000 (~GBP 7,700) in this way, with firms in Australia (50%), Canada (41%) and India (23%) also experiencing the same challenge.

In terms of payments outstanding, 33% of US small businesses estimate they are currently owed more than USD 20,000 (~GBP 15,500), with the average reaching USD 53,399 (~GBP 41,400) in outstanding receivables.

In the UK, a Dun & Bradstreet study found that the average amount owed to SMEs reached GBP 80,141 in 2018, and GBP 107,766 for London-based companies. 17% of UK SMEs are owed between GBP 100,000 and GBP 500,000. The amounts are particularly substantial for smaller firms and startups.

Future-proofing cash flow

In the UK, there have been several government initiatives in the last couple of years designed to help boost business cash flow and cut down on the late payment epidemic, but with no significant improvement. In fact, according to the Dun & Bradstreet report, late payments in the UK are getting worse: the average value of overdue payments increased by nearly 25% in the 12 months to October 2018.

Only 2,000 companies have signed the UK’s voluntary Prompt Payment Code since it launched five years ago, and even some of these firms are in breach of the code because they have payment terms of longer than 60 days. Since 2017, businesses have been required to report their payment activities every six months, although this appears to have hardly influenced payment habits.

Furthermore, the Small Business Commissioner role has also had little impact, possibly because he does not have the power to impose fines. One poll showed that 84% of SMEs believe the Commissioner would have no impact on their business.

Other countries’ governments have also tried to take action, and the European Late Payment Initiative proposed changes in the system. But these also appear to have had little impact, with just 28% of European small businesses being familiar with the legislation in a 2018 study – down from 31% in 2017.

Legislation and financial penalties should be implemented to help tackle the growing issue of late payments. However, such legislation takes time to draft, launch and enforce, and with small businesses already struggling, any new rules could come too late for many.

Interestingly, late payment causes the greatest impact on cash flow for 34% of the small business respondents to Intuit’s global study, whereas the time taken to process the payment once it is received is the most significant issue for the remaining 66% of businesses. Clearly, there is an opportunity for improvement in payment processing, which will have an immediate positive impact on business cash flow.

In 2018, Banking Circle carried out a study of over 500 SMEs, to better understand their cash flow and business borrowing woes. Demonstrating the size of the cash flow problem, 92.5% of our respondents told us they have required additional finance within the past five years. Almost all had experienced some difficulties getting hold of the cash they needed, including poor rates, high fees, slow facilitation and length of loan available. A quarter (24.6%) of the SMEs said that without additional funding they would have to let employees go.

Of course, in many cases there would be no need for a business loan if cash flow was more consistent and reliable. Some payment terms, through online marketplaces, for example, allow up to three months before payment is due. With late payment on top of that, many businesses are waiting far too long for receivables due. These sellers have incurred costs and are left out-of-pocket. With less flexible cash flow this delay between costs incurred and payment received can be the difference between success and failure.

Instant Settlement: the instant solution

Having been the only viable solution for a business loan for many generations, banks are often still an SME’s go-to finance provider despite slow set-up, relatively high interest rates and expensive arrangement fees adding to the cost of borrowing. Specialist lenders can provide a more cost-effective and faster business loan solution. But many apply very high interest rates which can make repayments a burden for a smaller business.

Receivables financing is one feasible and affordable solution, gaining popularity with businesses looking to mitigate the cash flow hit of late payments. And PSPs that tap into this new solution can enhance their customer retention – going to heart of helping their customers’ manage their business.

Also known as invoice financing, solutions such as Banking Circle Instant Settlement are offering a real alternative for SMEs in need of an instant cash advance. As a financial utility, Banking Circle is perfectly placed to deliver this convenient, flexible and lower cost solution via PSPs.

Through Banking Circle Instant Settlement, financial institutions can give merchants faster access to cash, with flexible repayment options and personalised online account management. And there’s no credit exposure to the PSP. Money is received as soon as the next business day with the entire application process taking up to 72 hours. This is in stark contrast to the average of 60 days a traditional bank takes to extend a new loan.

Access to extra cash could mean the difference between selling goods at full price or cutting prices; increasing headcount or letting loyal staff go. Moreover, access to affordable, flexible business finance could help a business expand, meet and beat its potential and benefit from the global economy while it does so.

Where once many smaller businesses were unable to achieve their global ambitions due to a lack of necessary funds, Banking Circle is improving financial inclusion by giving financial institutions the ability to offer loans to SMEs in need of extra cash. An affordable, instant cash advance, repaid when the outstanding payment is received, can provide the stop-gap a business needs to get through slower times or late payment issues without the long-term repayment commitment of a traditional business loan. This ensures they can reach their global potential without being held back by faltering cash flow.

Receivables financing gives merchants the facility of instant settlement of invoices due, without waiting for customer or marketplace settlement cycles. It keeps cash flowing and removes delays, which could perpetuate the late payment cycle. It could remove a significant hurdle for the 66% of SMEs for whom the time taken to process payments having the biggest impact, as well as the 34% for whom late payments are the biggest issue, giving PSP’s added value to enhance customer relationships.

About Anders la Cour

Anders la Cour is Chief Executive Officer at Banking Circle. He used his experience in legal M&A as well as in venture capital, coupled with a strong commercial acumen and entrepreneurial mind-set, to co-found Banking Circle (then known as Saxo Payments) in 2013, with backing from Saxo Bank. In 2018 he played a key role in arranging the acquisition of Banking Circle by EQT VIII and EQT Ventures. He is also a board member of YouLend and an adviser to other financial technology businesses.
Anders was named Entrepreneur of the Year in the 2016 Emerging Payments Awards and Gamechanger of the Year in the ACQ5 2018 Global Awards, in recognition of his leadership in bringing to market the innovative Banking Circle solution to tackle the cost and time challenges of cross border payments. He was appointed to the Emerging Payments Association Advisory Board at the end of 2016.

About Banking Circle

Next-generation provider of mission-critical banking infrastructure, Banking Circle is underpinning the service proposition of Financial Tech businesses, PSPs, FX providers and banks. By leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions to provide their customers with faster and cheaper cross border banking solutions, without the need to build their own infrastructure and correspondent banking partner network.