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How alternative finance can help protect SMEs against late payment

Late payment is back in the news following the publication of the Small Business and Productivity report by the Business, Energy and Industrial Strategy (BEIS) committee. The findings have provoked another round of hand wringing but will they lead to any meaningful action? Alternative finance offers protection against late payment.

The BEIS report has presented some eye-opening statistics and made for some attention-grabbing headlines. The committee has urged the government to introduce statutory requirements to pay invoices within 30 days, recommended that cash retentions be held in independent bank accounts and called for the Small Business Commissioner, Paul Uppal, to be given the power to fine late-payers. These comments come in the immediate wake of an announcement from the Cabinet Office that contractors would be excluded from public sector contracts if they failed to pay their supply chains on time.

Small businesses will be glad to see the topic making the headlines again and supportive of the sentiment shown by the BEIS committee and the Cabinet Office, but they have been presented with nothing new and as such, their optimism is likely to be limited. In recent years, there has been plenty of high-level rhetoric around the issue of late payment, by precious little concrete action to stop it. Despite all the proclamations, the Department of Business Innovation and Skills estimates that unpaid invoices amount to 14% of SME annual turnover, which works out at over £252 billion, while the costs associated with chasing payment are put at around £10.8 billion per year.

The construction industry is particularly affected by late payment (the anniversary of the collapse of Carillion is due soon) and the Building Engineering Services Association has recently claimed that over £10.5 billion of SME working capital is locked in retentions every year, with cash flow issues affecting companies’ ability to invest in skills, training and overall performance.

The BEIS report labels the scale of late payment market abuse and unsurprisingly the release of the study has led to calls for the government to legislate against the practice. Again, small business owners are likely to be widely in favour of such a step, but at the same time skeptical as to whether it would ever happen given the lack of appetite for such action to date.

Indeed, there have been regular calls for late-payment related legislation over the last 12 months. Interestingly, one such initiative involves allowing unrestricted access for small business invoice finance, with larger firms no longer being able to block the practice through binding contract stipulations.  Whether or not such legislation will see the light of day remains to be seen, but invoice finance can certainly help protect small business against late payment.

Invoice finance, a form of alternative finance, has become a key cashflow management tool in the wake of prolonged caution from traditional lenders. According to the Asset Based Finance Association, the total advanced to businesses in the UK and Republic of Ireland through invoice finance and asset-based lending was a £23 billion in 2017.

And invoice finance can be particularly effective in combating the impact of late payment. For example, when using invoice finance, as much as 90% of an approved invoice is immediately advanced by the finance provider. The remainder is paid once the balance is settled by the customer. This ensures that businesses have essential working capital.

The BEIS committee report has once more underlined the scale and severity of the late payment problem, which poses a real danger to the small business sector and the wider UK economy. Will it spur lawmakers into action? Small business owners won’t be holding their breath. In the meantime, invoice finance can help them safeguard their cash flow and give them the freedom to grow.

To find out more about A&T Business Associates services, contact Steve on 01903 602211 or steve.bowles@atbusinessassociates.co.uk.

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