Half of SMEs are getting paid after 72 days
Around 50% of small and medium size businesses (SMEs) in the UK are getting paid around “72 days after their work has been completed”, according to research from BACS Payment Schemes Limited research.
The result is that more than one-third of start-ups and SMEs are suffering with cash flow issues, with a total of £26 billion owed to those businesses who desperately need it to stay afloat, according to the research. This is particularly relevant to product manufacturers across retail, fashion, food and electronics.
Karen Holden, A City Law Firm, explains: “For small businesses to be working with large companies and operators is a dream come true, but after paying their overheads and staff costs, it adds a lot of financial pressure that they are only paid on delivery. If you haven’t secured a regular monthly cash flow, then you need a strong contingency plan.”
What options are available to SMEs?
The traditional approach is to use your previous savings or earnings as a buffer for future costs. For some firms this could be previous investment from angels, venture capital (VCs), partner companies or even parents or friends.
Many will turn to business loans, which can offer affordable rates from as low as 6% APR if you have been trading for a minimum of 24 months and the company has a good credit record. This can be in the form of SME loans from up to £1 million or using things like revolving credit facilities and invoice factoring to help you receive money upfront and pay interest as and when you need it.
Some business lenders will require some form of security including collateral against your office space or inventory, whilst others may require business guarantees or a copy of your invoice ledger as proof of your orders.
Business grants are also available from government sources providing that you are doing good for the economy or environment including helping employment, sustainability or health.
Improving payment terms
Whilst larger companies have standard payment terms and are often not easy to negotiate with, there are some other methods that small and medium firms can deploy. This includes asking for deposits upfront or negotiating payment to be paid within a certain date or subject to penalty.
Dealing directly with the accounts team of the company can also improve communication and move things along, rather than hoping that invoices and information is passed on successfully through another individual.
In addition, using other forms of payment and invoice software such as Xero and Stripe can help with automated follow ups and also giving the client the opportunity to pay online or via credit card, rather than make a manual BACS payment.