If we want to ‘level up’ Britain’s SMEs, banks and corporates should come together to get suppliers paid promptly

by maria
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By: Paul Christensen, CEO of Previse,

Covid-19 has left a permanent mark on the UK economy. A well-documented casualty of the turmoil from the last 18 months is small businesses. Despite forming the backbone of our private sector – accounting for three-fifths of employment and half of turnover – SMEs are yet to receive a full inspection into the scope of the problems which beset them. A recent report from MPs, ‘Scale up to Level Up’, says that a critical shortage of lending to SMEs is preventing the UK from “levelling up”. But, loans cannot support Britain’s small businesses as a standalone solution. So, as the UK economy begins to tentatively recover from the pandemic, how can banks and businesses come together to ensure that SMEs aren’t left behind?

SMEs are on borrowed time

Throughout the pandemic, the government has turned to borrowing and short-term loans to help SMEs stay afloat. The Coronavirus Business Interruption Loan Scheme (CBILS), for example, offered SMEs that had been adversely affected by the pandemic access to loans and other kinds of finance worth up to £5 million.

Loans are a commendable and effective response to short-term cash flow issues. However, to provide a sustainable solution to SMEs’ liquidity challenges, businesses and the government should be digging deep into the pain points that they face. Principal among these is the issue of slow payments to suppliers, which pre-dates the pandemic.

The ‘Scale up to Level up’ report hits a sound note here, because the solution to slow payments can be overcome by banks and businesses working together. Fintechs provide the bridge.

Sizing up the issue

It is estimated that 50,000 SMEs go bust each year due to late or slow payments. The problem has been worsened by Covid-19. Since the start of the pandemic, two-thirds of small businesses have received late or frozen payments with no clear idea of when, or if, they will be paid. The result is that SMEs are denied the cash they’re owed at a time when the supply chain crisis is bubbling away in the background. No wonder, then, that we cannot ‘level up’.

The potential gains to be made by faster invoice payments to suppliers are huge. Good Business Pays (GBP), a movement seeking to put an end to the slow payment crisis, estimates that paying SME invoices on the day they were submitted would create 460,000 jobs and increase the annual profits of small businesses by £6.3 billion. Unlocking this capital would not only help SMEs to ‘level up’ with the rest of the UK economy, but significantly strengthen supply chains.

Smart, sustainable and personalised solutions

Banks, businesses and fintechs can come together to solve the problem of slow supplier payments. It works like this: machine learning tech analyses corporates’ ERP data to predict the few invoices which are unlikely to get paid. The rest can then be paid instantly by funders such as banks. The buyer then pays the funder back on its normal payment terms. A true win-win for buyers and suppliers.

The technology is ready and available. But, for it to have an impact, it requires adoption at scale and a concerted effort from banks and businesses to play a role. This won’t happen overnight. In lieu of a machine learning-led solution to slow payments, we can look to improve the types of finance offered to SMEs. For instance, flexible advances with repayment terms that are matched to individual SMEs’ future revenues; and, have single, flat fees would prove hugely beneficial. Solutions of this nature provide invaluable support for small businesses that are forced to turn down new business opportunities due to cash flow restrictions.

In order to meet the economic challenges of today, solutions of the past need to be replaced by new innovations. Covid-19 has provided the impetus to reset the way businesses operate and presents a valuable opportunity for change that should not be missed.

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