SMEs must manage cash flow better to survive after the reopening

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As businesses around the world emerge from lockdowns and hope to rebuild their revenues back towards normal, there’s a new alternative data source to track every step of the journey.

Sidetrade, a provider of artificial intelligence-driven software for companies to accelerate their receivables, has a tracker for overdue payments from other businesses. It draws on a data lake of 26 million invoices, in aggregate worth €54 billion, submitted between 3.7 million businesses across six European countries: France, UK, Spain, Italy, Belgium and the Netherlands.

That group includes all the countries hardest hit by the pandemic.

The good news is that the percentage of invoices more than 10 days overdue, which rose alarmingly during the lockdown as companies strove to conserve cash, peaked at around the end of April.

As people go back to work, we see businesses ready to make purchases again. We don’t see why any sale should be lost for want of payment terms 

 - Lara Gilman, iwoca

In most countries, it was clearly decreasing by the beginning of June.

In Italy, for example, the percentage by value of overdue invoices doubled from an average of just under 13% before the pandemic, to a high of 28% at the end of April, before falling again to 19.5% at the end of May.

The Netherlands has been the best performer, having gone into lockdown with an average rate of overdue invoices of 15.5%. That climbed to 19.3% at the start of May before coming down to 18.2% by the start of June.

Leading from the bottom

As with so many measures relating to coronavirus, the UK experience has been by far the worst.

The starting point was much higher than for other countries, with 30% of invoices by value being 10 days overdue even before the pandemic struck. That rose alarmingly to 43%, higher than in any other country, at the start of May.

Worse still, it had barely declined by the start of June, when it still stood at 38.5%.

Many companies don’t seem to realize that technology exists to automate credit management processes. In the UK, maybe 5% to 6% of corporate businesses have that kind of technology. In the Netherlands, it’s closer to 70% to 75% of companies 

 - Rob Harvey, Sidetrade

By volume of overdue invoices, the UK looks even worse, with 53.4% more than 10 days overdue at the end of May, the same as at the start of the month.

Is this simply another case of the UK being last into lockdown thanks to its government’s inept response to the pandemic, suffering the worst hits and then being last out?

Or does it indicate a more structural problem?

Lara Gilman, head of new ventures at iwoca, a specialist SME lender, tells Euromoney: “Even coming into this crisis, before lockdown, UK small businesses were on shaky ground with overdue payments. Invoice finance is hard to access. It can also be expensive, and suppliers still have to manage collections while their customers might also be being hassled by an invoice factorer, which can damage relationships.”

Businesses have also been slow to adopt software solutions for receivables management.

Rob Harvey, global head of sales operations at Sidetrade, tells Euromoney: “We find that there is a lot more autonomy at the operational level around credit management at companies in the Netherlands, where finance executives can invest in the technology needed to fix problems like late payment.

“In the UK, by contrast, those technology investment decisions are taken at a much higher level within organizations, where finance operational teams may not have had much voice.”

Technological maturity

There may be a sense that payments going out are at least within a company’s control and can be delayed at the flick of a switch as they were in April; whereas collecting receivables is not and requires the manual processes of sending reminder letters, encouraging letters and finally threatening ones.

However, Harvey points out: “Technology to improve collections was born almost 20 years ago, at around the same time as customer relationship management software. Receivables and credit management is about financial customer relationship management. And yet many markets remain super immature.”

Big advances have arrived in recent years with AI and natural language processing.

Harvey says: “Many companies don’t seem to realize that technology exists to automate processes for sending dunning letters [overdue notices], reading buyers’ replies and responding accordingly by dynamically changing workflows in real time.”

He adds: “In the UK, maybe 5% to 6% of corporate businesses have that kind of technology. In the Netherlands, it’s closer to 70% to 75% of companies.”

This may now change, as companies that concentrate on creating a product and selling it realise the importance of the less glamorous process of collecting payment.

It may be sad that it has taken a pandemic to change this, but all that matters now is what comes next.

Eye opener

Harvey adds: “What happened in March and April is that many finance departments were suddenly plunged into disaster recovery mode and drew up dire revenue forecasts. They may now be telling their bosses things have turned out better than they feared, but only relative to their own expectations in the middle of the chaos. They are not benchmarking themselves relative to their competitors, their sectors or other countries.”

The invoice tracker might be an eye opener.

Sidetrade is doing more work on it. It has sector breakdowns for the UK, showing the highest rates of unpaid invoices being in finance, insurance and real estate (76% being over 10 days overdue); information communications and technology (60%); and leisure and hospitality (55%).

With 500,000 SMEs already in significant financial distress, we need to move quickly to protect the backbone of the British economy and ensure the right companies are protected from harm 

 - Gabriele Sabato, Wiserfunding

It would be useful to see if large enterprises are pressing other large companies to pay them promptly while extending terms to smaller buyers or whether they are delaying their own payments to small and medium-sized enterprises.

Gilman at iwoca says: “Small businesses are under duress. As we start anticipating economic recovery it is vital that they are not lost, because as well as employment, they also bring innovation, adaptability and local development to economies.

“And while there is a problem with some large companies squeezing SME suppliers, the majority of late payments are between SMEs in the supply chain themselves. There have been no good solutions for this.”

And that could prove terminal. The majority of bankruptcies still lie ahead.

While trackers like Sidetrade’s covering overdue invoices are up to date and show improvements in some parts of Europe at the start of reopening (even while problems persist in the UK), historic data now arriving confirms the extent of the economic shock.

On June 12, the UK’s Office for National Statistics estimated that the UK economy shrank by 20.4% in April.

Deputy national statistician for economic statistics Jonathan Athow says: “April’s fall in GDP is the biggest the UK has ever seen, more than three times larger than [March] and almost 10 times larger than the steepest pre-Covid-19 fall. In April, the economy was around 25% smaller than in February.”

Credit risk

Furlough schemes and government subsidized bank loans, which have kept companies alive during the lockdown, are about to taper off.

The worry for any SME supplier is how it might be left if one big customer with a large invoice outstanding goes bust before it pays, or a series of its smaller customers do. Insurance is one possible mitigant.

Wiserfunding, a specialist SME credit underwriter, announced at the end of May a new partnership with insurance provider Nimbla that offers trade credit insurance on a per-invoice basis.

Gabriele Sabato, co-founder and chief executive of Wiserfunding, says: “With 500,000 SMEs already in significant financial distress, we need to move quickly to protect the backbone of the British economy and ensure the right companies are protected from harm.

“Commercial credit insurance is the key to accelerating economic recovery, but trade credit is facing significant challenges and may disappear entirely during this difficult economic period – increasing the magnitude and length of the recession we are about to enter.”

This is not the kind of credit risk that’s easily managed by going to the debt or equity capital markets, or with the term loans now being provided by commercial banks.

Even if these loans are fully or partially state guaranteed, they still have to be serviced and repaid. They are not flexible.

“We recently surveyed 500 small business owners,” says Gilman. “Most have gone beyond saying they just want to survive towards thinking about what they want to do differently in the next phase.

“SME suppliers don’t want to be exposed to the credit risk of non-payment. They want payment up front or shorter delays. However, many SME buyers now want extended payments terms to manage their cash flows better and may refuse to deal with suppliers that won’t offer them.”

That’s quite a gap. How do you bridge it?

Iwoca’s answer is a new product called iwocaPay. This is an alternative to invoice financing. If an SME wants to buy a product or service, iwoca checks its credit within minutes and lends it the purchase price.

The supplier gets its invoice paid in full up front, almost as if it was selling to retail. For this, it pays a 3% fee.

The buyer pays no interest for 30 days. It can then either pay in full or in instalments up to 90 days.

Gilman says: “Our survey found that 40% of UK small B2B businesses have £10,000 or more in unpaid invoices since coronavirus. IwocaPay will lend up to £15,000 or as little as £150. But we expect most transactions to be between £4,000 and £10,000. 

“In terms of costs, if a buyer chooses to pay within the first 30 days, it’s free. If they’d like longer to pay, iwocaPay charges an interest rate based on the business (rep rate of 3.33%). They’ll also always have the option to repay early. The key flexibility is payment by instalment.”

There are technology solutions to help reduce days sales outstanding on overdue payments and some new financing options. But the problem is vast and the resilience of companies through the reopening remains to be seen.

Gilman says: “As people go back to work, we see businesses ready to make purchases again. We don’t see why any sale should be lost for want of payment terms.”