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Early warning signs of downturn and late payments harming UK SMEs

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

The regularity and prevalence of late payments have increased, to the point that they’ve become a common occurrence in the world of business. However, this practice is damaging small and medium-sized enterprises (SMEs) across the UK, who are faced with a bill of over £2bn every year.

Research from BACS Payment Schemes in 2017 showed that SMEs were owed a total of £14bn by their customers, and while that is a reduction on the £30.3bn figure owed five years previously, it was having a significant impact on their performance and growth strategies.

Relying on overdrafts

Currently, one in five small businesses say they are potentially facing insolvency if they are owed between £20,000 and £50,000, while 7% of businesses say they are already in that danger zone. As a result, a quarter of small businesses say they rely on cash from bank overdrafts to keep up with their essential overheads such as rent, utility bills, and buying or producing stock costs.

Late payments impact not only the growth and affordability of small businesses but also their ability to pay their staff on time; 16% of SMEs say they struggle to pay their staff on time as a result of late payments from clients.

Other possible solutions

With late payments being a major problem amongst SME’s, many should look to alternative solutions besides relying on their overdrafts. Invoice finance is the best way of bridging the gap between an incoming invoice and needing the money straight away.

Alternatively, if cash flow has become too much of an issue as creditors look to chase down their remaining payments, a company voluntary arrangement can provide you with the necessary respite to get yourself back on track.

WF late payments UK SMEs content

Chasing payments

The study also found that 12% of SMEs employ a specific person to pursue outstanding payments, with most companies spending around four hours a week chasing. With a third of companies facing delays of around a month, it’s clear why this is such a big problem and a constant worry across SMEs of all sectors.

Brexit uncertainty

In July 2017, the Federation of Small Businesses (FSB) published figures which pointed to a drop in confidence amongst its members for the first time since the EU referendum in June 2016. The loss of confidence can be attributed to many things, including business rate increases, a rise in inflation and the uncertainty surrounding Brexit; specifically, the ability to trade with the EU and employ staff from overseas in the future. This uncertainty continues today.

Another recession?

The report from the FSB echoes figures and sentiments found in a report from Bibby Financial Services, who found that some SMEs are showing signs that the UK economy could be heading for another downturn. Figures from the second quarter of 2017 show that the value of unpaid invoices written off by a business has risen to £20,403, this has increased by 70% in just 12 months.

Consequently, investment has fallen among SMEs with average planned investment down from £101,920 in Q2 2016 to £65,782 in June 2017. An uncertain economy, rising costs and a desire to build up cash reserves were all stated as reasons why some were investing less into their business.

Global CEO at Bibby Financial Services, David Postings, commented on the findings of the data;

SME activity is often a barometer of wider economic performance… right now we are seeing signs that businesses are delaying investment decisions… It is possible that this is a sign that the UK is heading for a recession, but it’s still too early to call. We will know for sure over the coming months.”

In summary

While late payments and uncertainty surrounding Brexit are blighting many SMEs, they have commented that the key challenges they face currently include winning new clients and contracts, managing cash flow and finding and retaining skilled staff. For now, it seems many SMEs will be aware of the tough times ahead and will work towards finding ways to deal with any issues to keep their business going.

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