A new study by the Asset Based Finance Association (ABFA) shows that unpaid invoices owed to UK SMEs are now valued at a staggering £67.4bn. Should SMEs simply accept these debts and adapt to new forms of financing?
Identifying the problem
ABFA research shows that SMEs now wait an average of 72 days for invoices to be settled, which is 11 days longer than the average waiting time during the peak of the recession in 2009.
These delays and a rising number of unpaid debts are having an impact on performance: research by software firm Intuit indicates that 32% of small businesses have been forced to take loans in order to pay suppliers and staff.
SMEs are finding innovative solutions to their financial problems, and the asset-based finance industry has benefited from small businesses' needs to branch out.
As the name suggests, asset-based finance companies view unpaid invoices as a security that can be used to access loans. When combined with other alternative cash sources like peer-to-peer lending, this type of finance can deliver a boost to SMEs' cash flows.
The ABFA's chief executive Jeff Longhurst argues that “businesses need to recognise that their unpaid invoices are an asset... they can be the key to unlocking critical and affordable funding.”
While it might seem like a great idea to harness the value of work that's already been completed, Dukes Bailiffs are concerned that small businesses are only getting one side of the story.
Addressing root causes
Both Dukes Bailiffs and the Confederation of British Industry (CBI) feel that companies should make their payment terms clear so that clients can forecast their cash flows.
If SMEs simply accept late payment culture and rely on asset-based finance to cover their lack of liquidity, these businesses could find themselves in a doubly tricky situation when late payers become non-payers. In cases where a company has chosen to accept finance on a 'recourse' basis, non-payment could even result in businesses having to return funding in addition to losing the value of their invoices.
Sensitive debt collection can help with liquidity difficulties and prevent SMEs from having to resort to alternative finance. If you're a small business owner struggling with unpaid invoices, contact Dukes Bailiffs and we'll help you to get your cash flows back on track.