What’s Missing In AltFin’s Efforts To Address Late Payments

Small businesses (SMBs) may have less control over their cash flow than one might think.

In the U.K., this issue has come to light as small businesses, FinTechs and regulators work to address late payments, which often occur when large corporations pay their small business suppliers on delayed payment terms, or even past those payment due dates. Yet even when a supplier is waiting on an invoice to be paid, that business still has to pay its own bills.

This imbalance can be detrimental to an SMB, and alternative finance has flooded into the small business lending space in an effort to fill funding gaps. But there’s another element missing to the small business cash flow management conundrum, says Michael King, CEO at PeerPay, other than improving SMBs’ access to funds.

If a small business cannot predict when cash flow may be tight, then working capital, whether obtained from an alternative finance player or a traditional FI, cannot be as strategically applied as possible.

“Often, the biggest challenge for business revolves around ‘credit,’ or more correctly, payment terms,” he recently explained to PYMNTS. “For some, this means researching their customers to make sure that they are a viable business that can meet their obligations within the agreed timeframe.”

It’s a straightforward concept — in theory, he addd.

“Reality is that many large businesses — powerful buyers such as chain stores — often change their payment terms to suit their own needs and not their supply chain, especially if the product is a commodity as part of their own financial planning,” said King. “If a ‘buyer’ says, ‘Sorry, terms are 45 days, no 30 days,’ especially if they are your major customer, then all the cash flow planning is out the window.”

In the U.K. especially, this tactic is becoming an increasingly worrying one. King noted that about half of invoices in the U.K. are paid late, and it takes an average of 72 days for one invoice to be paid.

“Late payments of invoices remains a continuous problem for SMEs, which potentially causes business failure, as cash flow cannot keep up with the company’s financial needs,” the executive said. “Good cash flow is about ensuring that more money is coming in than going out. It is the fact that money needs to come in on time that is the critical element — and if it doesn’t, what can you do about it?”

The executive added that he feels it is unlikely the B2B late payments culture of the U.K. will change anytime soon, despite innovations like eInvoicing.

“There have been various attempts to improve this space,” he noted, “but it is unlikely there will be a quick fix for the ingrained culture and widespread problem of late payment. SME firms need to consider alternative approaches.”

Indeed, the U.K. government has made several steps to address the problem. Earlier this year U.K. Labour Leader Jeremy Corbyn took a loud stance on the issue in the B2B payments space, saying he would “declare war” on large corporates that pay their small suppliers late. The government has also established Duty to Report rules that require large firms to make public their invoice payment practices.

Research released last month from insurance company Zurich found that larger businesses are more likely than smaller ones to pay their invoices late, with 53 percent of late payments owed to U.K. businesses coming from larger companies. The average value of a late B2B payment is more than $21,000, the report added.

Late payments and cash flow crunches are common problems for any small business. But when an invoice is paid late and the bills are piling up, King said small business owners need to keep their heads on straight.

“[Cash flow forecasting] is important, as you need to be able to act in a sensible manner rather than pressing the panic button,” he said. “There’s a myriad of ways of obtaining ‘credit,’ with some being more sensible than others.”

Traditional finance remains the top destination for small businesses, he said, while the peer-to-peer and alternative lending industry is also blossoming. King said SMBs should examine the invoice and asset-based finance space, an old classic on which FinTech is placing a new spin.

King’s PeerPay operates an invoice financing unit called FloFunder, which, unlike other invoice financing models, the executive said, does not rely on auctioning off unpaid invoices to find financing for small businesses. Instead, the platform automates the matching between appropriate investors and unpaid invoices.

Recently, the company announced news that it struck a partnership with cash flow forecasting solution CaFE in order to help small businesses not only access financing, but to be able to predict when they may need to do so.

There are other ways, King said, that small businesses can be proactive about proper cash flow management.

“As businesses evolve their strategies, they should be looking at their accountancy practice to assume a broader role in assisting them,” he noted. “This broader role will require accountants to apply financial expertise in combination with analytical, creative and risk management skills to help their clients develop their [businesses] and to keep themselves relevant.”

And as skilled accountants take on this more strategic role for small businesses and foster a collaborative relationship, financial service providers, too, should be taking a collaborative approach.

“In today’s world, firms and their people appreciate speed, flexibility and simplicity,” King said. “All good client service experiences tend to be based on share approaches merging together to give a clear and concise answer to the ‘question.’”

When that question is how to get a grip on cash flow in a business environment rife with late invoice payments, a collaboration between invoice finance and cash flow forecasting, and a collaboration between small businesses and accountants, can be critical to preventing what King described as the “dramatic” effects of late B2B payments and a cash flow squeeze.