SME Debt Problems

Cashflow CrisisLate payments and poor cash flow management is forcing small businesses deeper into debt. 

Small businesses in the UK and across Europe face an unequal financial proposition. On the one hand they are finding it more difficult to secure prompt payment from their clients, but on the other their own financial liabilities will not wait.

Despite legislation, the growing culture of late payments is storing up a debt crisis for SMEs. The question is: how will they force their way out of it? Many are turning to structures such as invoice finance to help with SME debt problems.

What is the UK’s small business debt crisis?

In recent years, the UK’s small business debt crisis has become increasingly evident. The number of small businesses struggling with late payments has risen sharply, and many are now finding it difficult to access credit. This is having a knock-on effect on the economy, as small businesses are forced to cut back on investment and growth.

The situation is exacerbated by the fact that many small businesses are unable to negotiate better terms with their suppliers. As a result, they are facing mounting pressure from all sides. The UK’s small business debt crisis is a complex problem, and one that is likely to have far-reaching consequences for the economy.

According to a recent study, the UK’s small businesses are facing a mounting debt crisis. The research, which was conducted by the Federation of Small Businesses (FSB), found that the average small business owes £33,000 in outstanding debts. This is a significant increase from the £20,000 owed by small businesses in 2012. The study also found that one in five small businesses are now in “significant” debt, owing more than £50,000. This is a cause for concern, as it could lead to a rise in business failures and job losses.

The FSB has called on the government to take action to help small businesses manage their debts. One suggestion is to provide more support for businesses that are struggling to make ends meet. In addition, the FSB has called for a review of the current insolvency laws, which could give small businesses more time to repay their debts. With the right support, small businesses can ensure that they remain financially stable and continue to contribute to the UK economy.

What could be done about the debt crisis?

The business debt crisis is a huge problem that needs to be addressed. Businesses have been borrowing money at an alarming rate, and the amount of debt they are carrying is becoming unmanageable. This has led to a number of businesses defaulting on their loans, which has in turn led to a decrease in the availability of credit. The situation is further complicated by the fact that many businesses are now struggling to make ends meet, and are only able to stay afloat by taking on more debt.

There are a number of possible solutions to the business debt crisis. One option is for the government to provide financial assistance to businesses that are struggling to repay their loans. Another option is for the banking system to be reformed so that businesses are not able to take on more debt than they can realistically afford to repay. Finally, it may be necessary for businesses to restructure their operations in order to reduce their level of debt. Whichever solution is eventually chosen, it is clear that something needs to be done about the business debt crisis before it spirals out of control.

Governments view on business debt

The UK government has made it clear that they view the current business debt crisis as a serious issue. In a recent speech, Prime Minister Rishi Sunak said that businesses need to do more to reduce their debts and that the government is working with banks and other lenders to help them do so. She also said that the government is prepared to take further action if necessary. This includes providing support to businesses that are struggling to repay their debts, as well as working with creditors to restructure loans.

The government has also set up a task force to investigate the causes of the business debt crisis and to recommend solutions. It is clear that the UK government is taking this issue seriously and is committed to finding a way to help businesses reduce their debts.

A culture of late payments for SME’s

Recent research suggests 76% of SMEs had been forced to write off bad debts. Last year the Federation of Small Businesses warned that the culture of late payments was bad and getting worse. Their research found that 84% of firms said they had been paid late with around 33% saying that at least one in four payments arrived later than had been agreed.   

Just as worrying was that 37% said payment terms were lengthening while only 4% said they were getting better. This trend flies in the face of moves both within the UK and across Europe to improve payment terms for small businesses. The EU’s Late Payment Directive states invoices should have a maximum payment term of 60 days. Here in the UK, the government has brought that down to 30 days.

If payments take longer to, businesses can levy late payment penalties and charge interest. Unfortunately, this seems to be having little effect in the real world. Businesses routinely report being asked to advance terms of more than 90 days.  

Invoice Financing Companies

The solution to this problem is not easy, but many SME ‘s are turning to an alternative form of financing known as invoice financing to help with debt problems. You might also have heard of this referred to as invoice factoring as it’s a good way to secure a cash injection without taking out another loan.

In its simplest form, invoice finance involves selling off a portion of your unpaid invoices. Its value is that it can unblock your cashflow and get money coming in to cover all your financial liabilities. It’s particularly useful for businesses which sell to other businesses and often have lengthy payment terms.

For example, businesses selling to the public sector see it as a good way to counteract the government’s notoriously slow payment processes.

It works simply. A factoring company can advance you a portion of the money locked up in your unpaid invoices. This will typically be around 70-80% of the overall total. They will then take responsibility for the management of your ledger which includes chasing all outstanding invoices. When the invoice is paid, they return the remaining sum to you minus their fees.

These can be a little complex. Costs come through factoring fees which is the charge for releasing the money to you. This is normally paid weekly or monthly and will be anywhere between 0.5% and 5% of the total invoice sum. Larger sums will generally be towards the lower end of this price range with smaller invoices being towards the top.

The cost will also depend on how quickly your customer settles the invoice. So, let’s imagine you have an invoice for 2,000. The invoice factor company agrees to advance 80% of that total, so you have £1,600 in your account immediately. They then levy a factor charge of 3% per month. Assuming the invoice is paid within 30 days, the cost of factoring the invoice will be £60, and you’ll receive the remaining £340. If they take longer to settle the cost will rise.

This does mean sacrificing a portion of each of your invoices, so you should only enter into it if you have a clear idea of how much it will cost. However, it can take the pressure off and allow you to concentrate on other things. You don’t need a good credit score to qualify and it won’t involve taking on more debt. So, if your firm is struggling, invoice factoring is well worth considering.

Late Payment Solutions

If you feel that your SME is having debt problems due to slow payers we can source business cashflow funding. As leading brokers within this sector we can demonstrate the advantages of debt factoring for your business.

We understand that businesses have issues with cashflow due to slow payers. Since we started trading in 2010 Invoice Funding have helped over 1000 business, over half are SME ‘s with Debt Problems. We are always happy to help businesses with these issues. Should you require more information, simply complete the online enquiry.

Business Finance specialist at Invoice funding | + posts

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

Fund Your Business

Speed up your cash-flow today. Forget issues caused by slow-paying customers