It’s tough being a SME especially when it comes to cash. Banks are restricting their lending especially to SME’s and when they do lend charge interest rates well above that extended to the large corporates. The average interest rates for loans less than £1 Million are double that for loans above £20 Million (N Blake Economic Advisor Ernst & Young).
Corporates further put pressure on their SME suppliers by paying suppliers on average 34 days after term dates (range 30 to 90 days). In the UK late payment is endemic despite an EU directive for all companies to pay within 30 days and a public sector commitment to pay invoices within 10 days. Ask any SME owner dealing with Government (Inst. of Credit Management).
Yet the SME sector is significant as proven by some statistics:
- SME’s comprise 59.1% of private sector employment
- 48.6% of private sector turnover
- Turnover in the SME sector is £3.2 Trillion!
- They employ 22.5 Million people
(Dept. for Business Innovation & Skills)
Yet their experience of the economic climate is vastly different then for the corporates. The increasing delay in both international and domestic payments (British Chamber of Commerce Quarterly Economic Survey) combined with the lack of access to funding is playing havoc with cash flows.
So what can be done? Many strategies can be adopted but one which is neglected in that 90% of invoices are still submitted on paper is e-invoicing. Aside from cost savings it will ensure early arrival at customers. The use of direct debit systems is increasingly being adopted with SME‘s lagging as perceived to be difficult to set up. Using DD will be especially useful to SME’s selling B2B. A scheme which uses this is the SEPA B2B Scheme and is used for lending decisions as well as it ties in well with the increasingly tightly integrated physical supply chains.
Enlightened corporates such as Tesco, B&Q and M&S have introduced supply chain finance to ensure that not only suppliers are paid more quickly but also enables these suppliers to borrow at a lower rate of interest. The key to this model is the visibility of the supply chain finance which enables banks to make decisions on real-time information as opposed to the traditional historic based balance sheet lending. This model will work less well when the customer base is themselves SME’s.
Relying on paper based invoices and traditional accounting processes leaves the SME with little bargaining power. By adopting both sales and supplier invoice e-invoicing with direct debit payments mechanism this will ensure terms are adhered too and payment will be sooner and being visible and transparent to banks easier to fund at better rates.
With the economic outlook remaining poor SME’s will need to look at alternatives to managing cash flow from the traditional methods.
(Additional sources AIA July/August 2012)
Richard Terhorst helps businesses with their financial management. Contact him on Richard.firstname.lastname@example.org or phone 07827293651