Credit control crisis for small firms worsens

SMALL firms are being hit by a pincer movement of suppliers billing quicker and fewer companies paying within agreed payment terms, according to new research.

The report by HSBC Commercial Banking found that one in five (18%) small businesses are being billed quicker by supplier with a further 20% reporting that fewer companies are paying within agreed payment terms.

The research follows figures from the Federation of Small Businesses (FSB), which showed that large firms are delaying invoice payments to smaller firms.

Yet according to the survey among senior decision makers of 596 small to medium-sized eneterprises (SMEs), many smaller firms are overly reliant on their savings and overdraft to fund both cashflow and big purchases and business investment.

It found two fifths of SMEs (40%) are raiding savings and a quarter (24%) relying on overdrafts to manage their everyday finances.

While nearly one in five (18%) used their overdraft to fund big purchases, such as business vehicles and equipment, with 11% turning to their credit card for business investment.

The research found that one in 10 are already using to invoice finance to actively manage their cashflow while around 10% are using leasing finance to help capitalise on their assets.

It is urging businesses to review their finances to ensure they have the best tools in place to manage their money, whether they trade solely in the UK or do business across the globe.

Noel Quinn, HSBC’s head of commercial finance for Europe, said:

“We are urging businesses to talk to their trusted advisers to ensure they have the right financial tools in place for the current environment.

“Our research tells us that many are still turning to their own personal wealth or overdrafts to fund their businesses and there are often more suitable solutions. Asset finance can help companies to capitalise on their assets when borrowing for growth and international expansion, while invoice finance can remove the headache of late payments and debt collection.”

Mr Quinn warned that although quicker billing and longer payments could put pressure on small businesses and form an unsustainable cycle, SMEs could break the cycle.

“Some may benefit from a review with their business bank and our experienced relationship managers are working in partnership with businesses to help assess their financial requirements and help them on the right path,” he said.

The bank has issued a series of do’s and don’ts to help small firms maintain a health cash flow.

They are as follows:

Do – keep cashflow budgets up to date, focus on receiving payment for sales, avoid unnecessary or excessive expenditure, and arrange appropriate financing before you need it.

Do not – assume payments will be received on time, tie up excessive cash in working capital, and overtrade by accepting orders you cannot finance.

Do – focus on key indicators which have a significant effect on performance, use budgets to anticipate problems, regularly review performance and find reasons for variances, use budget control as a prompt to action, and revise budgets as more up-to-date information becomes available.

Do not – confuse changes in timing with permanent changes to the levels of income or expenditure and ignore favourable variances without finding an explanation.

Do – chase debts as soon as they become due, try to resolve the problem if there is a genuine dispute, use firm but friendly telephone calls, keep records of everything that is said, and who you are dealing with.

Do not – accept excuses at face value without establishing what will happen next, offer further credit to customers who are not paying, take legal action if the debtor is unlikely to be able to pay.

Do – consider all the funding options – leasing, HP, loans and mortgages

Do not -tie up your personal wealth and overdrafts making long term purchases, use asset finance options instead and free up your overdrafts etc for short term requirements

 

 

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