At last, there are signs that conditions for businesses are finally improving.
The economy is growing, albeit cagily. The housing market is alive again. And the new Business Bank, though it’s not lending to SMEs directly, should spur competition in the market for business lending and boost confidence that lenders are still open for business.
To date, the Government’s measures to boost the economy have delivered their most noticeable impact in the residential mortgage market, where fixed-rate deals are currently available from as little as 1.84%.
In some cases, though, the new measures have also improved conditions in the market for commercial finance.
Some banks participating in the Funding for Lending Scheme are offering 1% off rates on approved business loans, commercial mortgages and hire purchase applications.
An extension to the scheme, announced by Chancellor George Osborne in his 2013 Budget, will be more heavily weighted towards business interests. This will allow lenders to be more proactive and less risk averse, which should prove beneficial to the business environment.
The Problem of Cashflow
So there is room for cautious optimism. But let’s make no mistake: we’re not out of the woods yet. It may be some time before small and medium-sized businesses recover their fluidity when it comes to cashflow.
It is inevitable that a culture of late payments arises during times of such economic strife. In April, the Forum of Private Business (FPB) reported to MPs that over a million small businesses had reported concerns about late payments.
It’s no small issue either. Shockingly, 35% of small firms reported a reduction in profit due to late payments, while 16% have experienced a sizeable reduction in turnover.
This is partly due to big businesses exploiting their position by keeping money in the bank for longer. Alternatively, convoluted payment systems can delay the processing of invoices by months at a time.
But small firms are heavily dependent on a steady flow of cash. Stopping this effectively restricts the lifeblood of the company. Late payments so often have a knock-on effect, with SMEs left struggling to manage a precarious financial situation and keep their own suppliers happy.
A cultural attitude of late payment has developed in the UK. We need to reverse it quickly before more small businesses go under.
Alexander Jackman, Head of Policy, Forum of Private Business.
This is why some businesses prefer invoice finance. Invoice finance (also known as factoring) frees up working capital against the value of invoices, meaning that businesses don’t need to be hindered by delayed payments.
Having extra working capital in hand gives business owners the power to keep their businesses running, to retain purchasing power, and (where relevant) to exploit economies of scale.
Alexander Jackman, the FPB’s Head of Policy, has urged firms wherever possible to move to an e-invoicing platform – a cheaper, faster and more efficient solution. “The savings are huge so it’s a clear win-win,” he said.
With over a third of firms reporting that late payments have damaged profits, it is clear that the system requires fixing. Clearly, moves need to be taken to shore up regulation. In the interim, though, banks could have a vital role to play if firms look towards invoice finance to reduce the effect of delays and keep themselves on track.