If you are a small business leader reading this, then you have overcome a major barrier to growth. Many SMEs are simply unaware of the new kinds of financial support available to them. SMEs’ awareness of alternative financial solutions is going to be crucial for sustaining positive cash flow in the coming months.
Research has shown that half of UK SMEs are being paid later than usual, and a third have experienced customer defaults. As businesses exhaust the funding that is available from BBLS and CBILS and Government furlough schemes end, businesses will be strapped for cash. Thankfully, there are more tools in the toolbox than ever before to help small businesses expand into new markets, navigate international trade and grow.
Why small businesses grow more slowly than corporations
The crisis worsened a longstanding funding deficit among SMEs, which the Bank of England estimates at around £22 billion in the UK, and just under a trillion pounds globally. This means that the vast majority of businesses grow much more slowly than they could. In normal circumstances this might be sustainable, but to recoup the loss caused by the pandemic, UK businesses need to grow.
Largely due to the diversity of small businesses in comparison with corporates, SMEs have traditionally lacked the access to the financial products that larger businesses enjoy. But fintech is changing this, and small businesses have a huge opportunity to capitalise on new financial products to help them through the downturn. For example, real-time payment and transaction data has enhanced credit scoring, making trade credit insurance affordable for SMEs for the first time.
Trading securely in a crisis
Trade credit makes up almost half of the assets of the average UK business. This is because companies offer their business customers credit of 30, 60 or 90 days to facilitate trade. But this creates a potentially devastating risk to cash flow that small businesses rarely insure. In normal conditions, late payments cost UK businesses £20 billion each year, but research suggests that this year the stakes are much higher. So it has never been more crucial to do your due diligence on customer credit risk and be proactive about protecting your business’ cash flow. Especially in closely networked SME ecosystems, insolvency contagion is a real risk.
It took seven years for lending to SMEs to return to pre-crisis levels after the 2008 financial crisis. Excessive risk of customers defaulting on payments naturally made the business community uncomfortable with offering credit. The resulting constraint on credit or ‘credit crunch’ hampered economic recovery at exactly the time when growth was needed most.
Unlocking international trade with invoice insurance
To shore-up supply chains and prevent another credit crunch from stalling the economy, the UK Government introduced a temporary trade credit reinsurance scheme in June. This means that the Government is shouldering the risk and uncertainty caused by the crisis so that business can proceed unimpeded by a lack of credit. Companies will continue to be able to insure affordably against nonpayment and trade with confidence. All of this helps to keep cash flowing through supply chains.
Open Borders Direct is helping businesses to de-risk international trade by partnering with a single invoice insurance offer. In a market in which a third of businesses are failing to pay on time or at all, invoice insurance gives small businesses the flexible protection against customer defaults. You can insure a single invoice, or your whole ledger. Knowing you’ll be paid even if the worst occurs and a customer becomes insolvent, can give you the confidence to pivot your business effectively, enter new markets and grow sustainably.
Fintech and the future
In uncertain trading conditions, insights like those offered by Open Borders Direct can be critical to a business’ success or failure. The businesses that will survive and even thrive in this crisis will be those that harness fintech in service of the ingenuity that has always been a core strength of small businesses. We will see more insolvencies over the next few months, but SMEs are more agile than corporates, and can still use this advantage to pivot effectively.
In the future, credit scoring will be richer still, reflecting real-time shipment data, satellite imaging and macro trends. Even as businesses exhaust BBLS and CBILS, increased demand for new financial products could pave the way for further price reductions. And giving innovative SMEs access to financial support and company credit insights could help to position the UK as an international innovation hub. Uptake of new financial products is likely to be business-critical for small businesses, and the economy.
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