As difficult macroeconomic and geopolitical conditions persist, growth is becoming especially difficult for SMEs to achieve in the UK. Unpaid invoices, cash flow difficulties and a lack of support have left many small firms in a difficult spot. In this environment, can SMEs find the support they need?
Here, Sinead McHale, CEO of Satago, the cloud-based cash flow management and invoice finance solution, discusses whether the government’s stance on late payments goes far enough for SMEs.
SMEs are the backbone of the UK economy, providing local jobs and revenue across all sectors. However, the current economic climate and high inflation are still massively hindering them from reaching their full potential.
Late payments, tight cash flow, and poor access to capital are still big issues stopping SMEs from being able to invest in growth – and all too often, creating bad debts.
With over £32billion in late payments plaguing them, SMEs need sustained and meaningful policy action from the government going forwards, and better working capital tools.
How is the government currently supporting SMEs?
The UK Government’s recent launch of a Small Business Council comes hot off the heels of its Cash Flow and Prompt Payment Review in late 2023. Among its most important areas of focus, the Council has been set up to address malpractice against SMEs, notably late payments. From April this year, businesses working with SME suppliers in the public sector will also be expected to demonstrate average payment terms of 55 days.
In his Spring Budget announcement earlier this month, Chancellor Jeremy Hunt had an opportunity to reengage with SMEs. The announcement called to raise the £85,000 VAT threshold, and to extend the Recovery Loans Scheme, both areas that show the government has responded in part to calls made by the sector including the Federation of Small Businesses.
An extended 5p cut in fuel duty and proposed extension to advance loan repayments has also been welcomed by vulnerable households and especially some of the SME founders running businesses on their own.
But did these measures go far enough to help SMEs to thrive as well as survive? And what about tackling the cost to the UK economy of a late payment shortfall of £32billion?
The pervasive problem of late payments
‘Cash is King’ has never been more relevant to SMEs in 2024 – many of which are at risk of going out of business in mere weeks without it. In 2022, the Federation of Small Businesses found over half of UK SMEs experience cash flow problems due to late payments – and, in fact, when businesses do fail, it’s more likely to have been due to running out of cash, rather than a problem with their profits, customer demand, or quality of their product.
Failure from larger customers to pay the SMEs they’re doing business with on time, has far-reaching impacts on SME owners. Over a third (34 per cent) of SME owners have put their life savings and home on the line for their businesses by signing a Personal Guarantee for a business loan, according to Purbeck Personal Guarantee Insurance’s survey last year.
The results mean many SMEs will be driven into increased borrowing to manage their cash flow, putting themselves and their business in a truly precarious position – just to stay afloat and keep trading. It’s little wonder that, while being preoccupied with simply keeping their businesses above water, many SMEs are losing out on the chance to invest in their own growth.
It’s clear that tackling late payments requires tougher regulation from the government to increase penalties on those businesses ignoring their payment terms – but there’s more the financial services industry as a whole can do to support SMEs. This is where better options for SMEs to reduce the risks of doing business come into play. SMEs desperately need better-working capital tools that can provide secure, reliable, and most importantly, faster, access to credit to unleash their potential and focus on growth.
How better-working capital tools could add billions to the UK economy
In fact, the right working capital solutions directly address the power imbalance, in favour of SMEs. For example, access to invoice financing tools means SMEs can convert unpaid invoices into reliable cash flow quickly. This provides more than just a lifeline for SMEs – they’re also helping shore up employment, project investment, and the wider UK economy.
In contrast to overdrafts, credit cards and personal loans, which are fixed lines of credit and generate additional interest faster, invoice financing tools are designed to support SMEs with more flexibility, scaling access to credit and working capital as they issue larger invoice volumes.
Invoice finance can give SMEs access to cash tied up in unpaid invoices – equipping the business with immediate access to working capital. For larger companies that might run on debt, it can be a chance to pay this money back, too. Unlike riskier options which could mean SMEs accrue more debt, invoice finance takes the pain out of getting paid and lets them get on with growing their businesses for the wider benefit of the UK economy, too.
For SMEs to be able to both operate healthily and realise their growth ambitions, they rely on steady, secure and reliable access to cash flow. But they can’t do it alone, and this is where both the government and industry experts, should come together to combine better practical regulation, with better working capital tools, for the best outcomes for all.
