The impact of Late Payments on Cash Flow
During Covid-19 small businesses across the UK are striving to survive and keep cash flow positive. This can be particularly challenging when their customers are taking longer to pay and therefore stretching cash flow further. Employees are being furloughed to reduce overheads. Also, many SME’S are taking on board Government-backed loans such as the BBLS (bounce back loan scheme). The BBLS is for businesses that are looking to borrow between £2,000-£50,000 in as little as 24 hours. The government covering the first 12 months of interest payments. A business will be able to have access to the loan, up to 25% of their turnover as a lump sum payment.
Pinnacle and your accountant can help you through the process of applying for a government-backed loan. The scheme is initially open until the 4th of November 2020 with 100% Government backing. The term of the loan can be up to 6 years keeping monthly repayment as low as possible, however increasing the overall interest payable.
There are alternative business finance options available to UK businesses that will mitigate late payments and keep cash flow strong. The labour peer Lord Mendelsohn has introduced a Private Members Bill to the House of Lords to tackle the issue of late payments for small businesses. This was proposed in January of 2020. Commonly with 30-day payment terms on an invoice if the customer exceeds this term, there is little to no fines incurred. This has repeatedly put a strain on cash flow for businesses. Especially in industries such as haulage, recruitment, and construction which rely on a positive cash flow position to pay staff, maintain vehicles, and buy materials.
What Is the cost to SME businesses?
Pinnacle Business Finance is a member of the FSB (Federation of Small Businesses). A report was generated by the FSB back in 2016. This gave some headlines figures on the impact of late payments on the economy. A staggering 37% of small businesses reported having cash flow difficulties and resulting in 30% running into their overdraft. In addition to this, nearly 23% of all insolvencies in the UK were due to late payments. The estimated cost of this to the economy was 2.5 billion!
What cash flow solutions are available?
One funding option available is invoice finance. There are 2 facilities which can be utilised to tackle cash flow using invoice finance. These are factoring and invoice discounting. These finance facilities are used to mitigate late payments and free up capital which is tied up in outstanding invoices. Furthermore, if a business has particular customers who are late at paying and require funding on these, then selective or spot factoring can be used. This is where the business picks and chooses what invoices or customers they want funding on.
Credit Line facilities?
A credit line facility can also be used to tackle problems with cash flow and increase turnover levels. A credit line facility is a set amount of funding that a business can borrow and pay back over a flexible term. This operates like an overdraft and provides an SME or corporate venture the ability to access large amounts of funding as required.