After crisis became the status quo in 2008, all businesses
learnt lessons the hard way on how to survive in this brave new world. Cash
flow problems account for a huge percentage of corporate bankruptcies: in 2008,
for example, 4,000 UK businesses failed as a direct consequence of late
As of the end of 2012, British small and medium-sized
enterprises (SMEs) were collectively owed £36bn in late payments and more than
124,000 small and micro businesses said they were close to being put out of
business by late payments.
Overdrafts have traditionally formed the
primary method of easing working capital for SMEs. However, last year the UK’s
Federation of Small Businesses (FSB) reported that overdraft borrowing had
fallen. The wider picture of business lending shows an overall fall of £3.1bn.
Whilst lending for SMEs appeared to pick up in June, over the past six months
lending to British businesses has fallen by an average of £500m a month.
The rot at the heart of poor credit, cash flow worries and late payment
has led to a surge in interest around alternative financing services. Supply
chain finance (SCF), factoring, crowd funding, invoice financing, angel
investors and even government grants have emerged as options for businesses
struggling with cash flow concerns. However the issue for supplier side
businesses is that these forms of credit – used to ease working capital – are
more expensive for them than for their larger customers.
these measures have been criticised for supporting businesses that should be
subject to the Darwinian rules of survival of the fittest. However when doing
large volumes of business with major corporate, or even government departments,
cash flow pressures can be experienced by businesses of all sizes and success
Championed by banks and also by the government, SCF is being
heralded as a potential solution to this thorny issue. SCF is the practice of
receiving cheap short-term credit from banks against the security of an invoice
as yet unpaid. With large companies continuing the practice of squeezing
suppliers with lengthy payment terms and late payment, it can be an essential
means of loosening the choke collar of punishing payment practices.
bid to build cash buffers and avoid risk, many banks and credit card companies
are simplifying accessibility to finance options such as SCF, while keeping a
firm hand on more traditional credit offerings. The latest of these is Deutsche
Bank’s release of an SCF app to support large businesses in the process of
notifying banks regarding approved invoices.
However, as with many
forms of alternative funding the burden of proof is high. In the case of SCF,
proof needs to come from both sides of the buyer/supplier relationship as to
the status of the invoice and the supplied goods.
Anyone who has ever chased an invoice knows that
status can be fluid at best – and when selling to a large business that can
become even more complex. When seeking to borrow against approved invoices,
many businesses struggle to obtain the evidence they need.
SCF, a bank is notified by a large company that an invoice has been approved
for payment. The bank or credit provider is then able to offer a 100% immediate
advance (minus a finance fee) to the supplier at lower interest rates, knowing
the invoice will ultimately be paid by the large company.
the large companies with this information often have little vested interest in
providing it quickly and, knowing what the internal financial systems of some
large companies look like, confirming approval is not always a quick job. Basic
tasks such as matching an invoice to a purchase order (PO) can take an
inordinately long time – and if the invoice is for a significant amount the
approvals journey can be a lengthy one.
Paper is often the source
of a great amount of confusion on invoice status. Shifted from desk to desk to
drawer and occasionally lost entirely, paper invoices are difficult to track
and thus a challenge to confirm the status of. PDFs are often in no better a
position, attached to emails that are invariably ignored. Automation is core to
optimising this process, and providing the level of clarity, accountability and
transparency that supporting SCF requires.
While prime minister
David Cameron has weighed in on the subject, encouraging big businesses to help
banks’ and SMEs’ calls for proof, as of last year only a small number of the
UK’s biggest companies had agreed to commit to supporting this process.
While big businesses need to get their ducks in a row, there are ways
that SMEs can improve their case. A clear, automated and traceable process
around invoices is a must. Robust financial processes make corporates more
attractive to prospective investors, and if the treasury department has to call
upon cash tied up in invoices, they need to know exactly where these are and
how much is pending. Collaboration with suppliers is at the core of the call
for evidence, so SMEs should ensure they can keep track of all communications
around each invoice as well as raising and settling disputes quickly.
According to reports,
of this sort could accelerate UK small businesses’ access to £20bn of cash
and lessen the need for bank overdrafts and loans.
For many, a
clearer and more robust process around invoice handling can even free up
previously hidden cash within the organisation. For larger businesses, greater
clarity about what has been spent, what’s outstanding and invoice status can
lead to more rapid processing, helping them to avoid late payment. A
transparent system also enables companies to work more closely with their
suppliers. This can help businesses identify opportunities to consolidate
suppliers, remove wasteful spend and negotiate better terms. For businesses
collaborating with their suppliers, SCF can form a part of this process,
perhaps as a means to pay quickly and secure reductions.
not going to be closing their overdrafts, kicking back and relaxing when it
comes to cash flow any time soon. But increasing clarity and transparency
around their finances, better services from banks and credit providers, as well
as ease of collaboration with both customers and suppliers, could all help to
alleviate some of the pressures of dealing with larger businesses.
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