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Late payments stifle SME funding access

Author: ICAEW Insights

Published: 11 Aug 2021

Many are concerned that access to finance will become harder for the UK’s SMEs over the next three years as they continue to grapple with the late payment of invoices.

The ongoing fallout from COVID continues to weigh heavy on businesses with the risk of further lockdowns, concerns around customer demand, inflation pressure and recruitment difficulties cited as the biggest barriers to reopening, a survey by the British Chambers of Commerce and Funding Circle has found. The consensus among many SMEs is that access finance would help overcome the remaining barriers they face and be key to unlocking their full growth potential. 

Another survey conducted by investment holding company MBH Corporation found that around one in three SMEs want to borrow to fund their growth plans. Although just 17% of businesses that applied for loans in the last year were rejected, around 40% of the SME respondents believe applying for funding will become more difficult over the next three years. The biggest impact on the business from being turned down was not being able to expand exports or hire staff. 

Former Small Business Commissioner Philip King, who recently handed over the Small Business Commissioner reins to former BBC broadcaster and small business campaigner Liz Barclay, told ICAEW Insights that the pandemic has been particularly tough for small businesses. “Now, as various supportive measures end and repayments on bounce-back loans start to become due, cashflow is going to be tighter than ever. As businesses try to recover they will need increased supplies and resources at a time when trade credit is likely to be restricted and finance less available.”

Access to finance is particularly important as, despite attempts to beef up the Prompt Payment Code, late payment continues to plague many SMEs. From next month, signatories to the code commit to paying 95% of invoices from small businesses (those with less than 50 employees) within 30 days – slashing the time outlined in the current code by half. The target for larger businesses will remain 95% of invoices within 60 days.

Since January, finance directors, CEOs or small business owners must also take responsibility by personally signing the code and acknowledging that under its terms, suppliers can charge interest on late invoices. King said the reforms to the PPC will play their part in supporting small businesses and improve their lot. “It’s an important tool in driving change in payment culture but there is no single silver bullet. Cultural change requires fundamental change and a shift in mindset that focuses on collaboration and partnership working. Paying on time needs to be seen as a key part of the ESG agenda.” 

According to official statistics, late invoices totalling £23.4bn are owed to firms across Britain. And the majority of UK firms expect an increase in late payments over the next 12 months, according to the European Payment Report 2021. The report, which surveyed 11,000 businesses across 29 European countries, found 62% of UK firms were more concerned than ever about their customers’ ability to pay, with a further 46% stating the payment gap as a real risk to the sustainable growth of their business.

King said all businesses had been impacted by the pandemic with some benefitting but far more suffering from the uncertainty, pressure on cashflow, and inability to trade as normal. “Some big businesses have shown real leadership by accelerating payments to their smallest suppliers and supporting them. What has become crystal clear is that late payment doesn’t only impact on the finances of a small business but also affects the business owner’s wellbeing and mental health. What, for a big business, is a few rows on a spreadsheet can, for the micro-business owner, be the difference between buying food for the family or not. We need to humanise the issue and move our thinking from the transactional to the emotional.”

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