In the vibrant landscape of UK small and medium-sized enterprises (SMEs), one persistent challenge threatens to undermine growth and stability - late and missing payments. 

Having previously launched several financial products to help SMEs run and grow their businesses, I’m aware this issue is not just a minor inconvenience; it represents a significant financial burden, affecting cash flow, operational efficiency, and overall business health. It narrows the margin between surviving or closing.

Understanding the magnitude of this problem and implementing robust solutions is crucial for SMEs aiming to survive and thrive in today’s competitive market.

The scope of the problem

Late payments are a pervasive issue for UK SMEs. According to a report by the Federation of Small Businesses (FSB), around 50,000 SMEs close annually due to cash flow problems primarily caused by late payments1. 

Furthermore, the average SME is owed £22,000 in late payments, tying up substantial capital that could otherwise be used for growth, or even just running a business day to day2.

Financial impact

The financial implications of late and missing payments are profound. 

UK SMEs spend an average of 1.5 hours a day chasing late invoices3. Time worth £6.3 billion to the small business economy is spent pursuing owed cash, rather than invested in making money, supporting employees or growing their business4.

This administrative burden diverts resources from core business activities and strategic initiatives.

Links between cash flow and business failure

Cash flow is the lifeblood of any business, particularly for SMEs. A steady cash flow ensures that a business can meet its obligations, invest in growth opportunities, and weather economic fluctuations. 

Conversely, poor cash flow management can lead to severe consequences. Research indicates that 82% of business failures are due to poor cash flow management, highlighting the critical importance of maintaining a healthy financial position5.

Addressing the challenge: strategies for SMEs

To mitigate the impact of late and missing payments, SMEs can adopt several strategies:

1. Credit management solutions: Leveraging tech to streamline the credit management process. 

2. Clear payment terms: Establishing clear, concise payment terms and conditions can reduce misunderstandings and disputes. Ensure these terms are communicated effectively at the outset of any business relationship.

3. Regular Follow-Ups: Implementing a systematic approach to invoice follow-ups can ensure timely payments. Automated reminders and follow-ups can reduce the administrative burden and improve payment timeliness.

4. Legal Recourse: In persistent cases of late payments, seeking legal advice and considering debt recovery services might be necessary. While this should be a last resort, it underscores the seriousness of timely payments.

    

The role of technology

Technology plays a pivotal role in addressing the issue of late payments.

Equifax is launching a suite of tools that streamline and automate the credit management process, which will help enhance credit checking, payment chasing, and debt recovery, providing a comprehensive solution for managing and mitigating payment issues.

Connected Credit Control will enable SMEs to:

• Credit check and monitor companies, making informed decisions about potential clients.

• Automate payment reminders and follow-ups, ensuring that invoices are not overlooked.

• Provide instant quotes for debt recovery, facilitating efficient management of overdue invoices.

By using Connected Credit Control, we believe SMEs can significantly reduce the time and resources spent on chasing payments, enabling them to focus on core business activities.

Banks and cash Flow: A symbiotic relationship

Banks play a crucial role in the financial ecosystem of SMEs, often providing the necessary capital to support growth and operations. 

However, when SMEs suffer from poor cash flow due to late and missing payments, their ability to repay loans and meet other financial commitments is compromised. This can lead to increased risk for banks and potential defaults on loans.

Why banks should care

1. Reduced risk of defaults: Ensuring SMEs have a healthy cash flow reduces the risk of loan defaults, making them more reliable borrowers.

2. Stronger client relationships: By supporting SMEs in managing their cash flow, banks can build stronger, more loyal relationships with their clients.

3. Opportunities for additional services: Banks can offer additional financial services, such as invoice financing or cash flow management tools, creating new revenue streams.

How banks can help

1. Providing cash flow management Tools: Banks can partner with Equifax to offer their SME clients integrated cash flow management solutions.

2. Offering flexible financial products: Developing financial products (both debt based and non-debt based) that align with the cash flow cycles of SMEs can provide much-needed flexibility.

3. Early warning systems: Implementing systems to detect early signs of cash flow issues can allow banks to proactively support their clients.

In conclusion

Late and missing payments represent a formidable challenge for UK SMEs, but with the right strategies and tools, this issue can be effectively managed.

Leveraging technology, establishing clear payment terms, and maintaining regular follow-ups are essential steps in ensuring timely payments. 

Platforms like Equifax’s Connected Credit Control could offer invaluable support, helping SMEs streamline credit management and safeguard their financial health. 

By addressing late payments proactively, and putting in place the right upstream checks, SMEs can enhance their cash flow and focus on growth and innovation. For banks, supporting SMEs in this endeavour not only reduces risk but also fosters stronger client relationships and financial stability.

Email me on mike.coley@equifax.com if you’d like more information on Connected Credit Control.

 

 

 

 

Sources:

1 Federation of Small Businesses (FSB): Payment and cash flow review report Nov 2023

2 Smart Data Foundry: Payment Speed and Timeliness for UK Small & Micro Businesses Nov 2022

3 Tide survey of 1,000 CEOs, founders, directors and senior management staff at UK SMEs 2019

4 Intuit Quickbooks research Nov 2019

5 US Bank Study 2023