Tim Vine, Head of International Finance & Risk Solutions at Dun & Bradstreet
Following the news that GDP contracted by 0.2% in December last year, as well as higher inflation, a national insurance rise, and increasing energy expenses, it’s fair to say SMEs are facing what could be considered one of the toughest times imaginable. In fact, the Association of Chartered Certified Accountants revealed that SMEs are more stressed than normal, up from 20% pre-Christmas.
Given that SMEs account for 99.9% of the UK business population, SME recovery is vital. Covid-19 put many small businesses under an extreme financial strain, and those businesses can now only expect to fully recover if they have regular and reliable access to funding. But that’s easier said than done. In fact, UK small firms currently face an average of £130,000 in late payments – and that’s largely due to suppliers not making payments on time, which has a knock-on effect on a business’s cash flow.
Fortunately, however, the pandemic did serve to showcase the many financing choices accessible to SMEs, which is helping to stem the flow of cash out and increase the cash flow back in. According to Dun & Bradstreet’s Surviving a Pandemic report, 54% of SMEs surveyed are more aware of funding alternatives than they were at the beginning of last year, and – as a result – more inclined to seek financial assistance today than they were pre- pandemic.
But now that lockdowns have lifted and we have fewer restrictions in place, how can SMEs overcome financial challenges in the “new normal”?
The problem
It’s been a challenging year for many companies, and enterprises of all sizes have been forced to move online. Developing and incorporating a digital offering can be a complex and costly challenge, but many businesses wouldn’t have survived if they hadn’t done so. We’ve seen many small businesses embrace digital and unlock new income sources like never before and, fortunately, the government has provided financial assistance as needed.
And yet late payments still became more prevalent amongst UK SMEs. In fact, over a quarter of payments to surveyed SMEs were received late in 2020 – a staggering 76% increase from 2018 thanks to Covid-19.
With 51% stating late payments reduce overall business efficiency, and 23% of SMEs having to use savings and investments to cover the deficit caused by late payments, it’s clear why calls for reforms to the UK Government’s Prompt Payment Code have finally been headed.
But sanctions from the government, and the increased knowledge of financial assistance available to SMEs, still won’t address the issues of late payments overnight. Data seems to be the only long-term solution.
The solution
Small businesses don’t have the same assets or advantages as larger corporations, which means they have to be especially cautious when it comes to dealing with financial difficulties and opportunities for growth. As such, data and analytics have become the strongest weapon in an SME’s armoury and the only real way to help reduce late payments.
For starters, it allows SME owners to know who they’re working with, which can make their finance department feel more confident and at ease in day-to-day business interactions. Similarly, there are many hazards connected with selecting new business partners nowadays, so personal preferences aren’t always enough. Again, that’s where data can help to create a more holistic picture of the customer or supplier.
After all, data is critical for powering intelligent credit decisions in real-time and ultimately avoiding excessive risk. But it can’t simply be any old data; it must be trustworthy and easily available for small firms to perform credit checks or agree to new loan conditions quickly.
And it isn’t a one-way street either; small firms must create their credit record as well, and keeping positive credit may go a long way toward finding new, perhaps even improved, business partners or even greater external investment where needed.
The only way for small companies to deal successfully with potential partners, compare their credit scores, and acquire a better understanding of them, is by analysing the right data.
Late payments continue to be a challenge for SMEs in the UK. However, with stronger rules in place and pioneering data-driven solutions growing in prominence, overcoming payment barriers and better assessing prospective partners or customers becomes far less of a daunting task, and ultimately can help companies mitigate risk.
