It’s clear that economic recovery is beginning to stall. Shortages of key materials combined with rising prices suggest that a “winter freeze” is looming over the UK economy.
Against a background of stagnating growth, recent research from EY suggests a third of SMEs are worried they will not be able to repay their Covid loans, while a survey by Moore UK revealed more than 40% are planning redundancies over the next six months.
Throughout the Covid-19 pandemic, government support helped small businesses to stay afloat. Temporary measures such as the furlough and Coronavirus Business Interruption Loan Scheme essentially put the economy on life support, allowing businesses to weather the worst of the storm.
This very support has created a huge pile of debt that small firms are now struggling to pay back, with more than £20 billion of government-backed loans likely to never be repaid.
Thousands of firms are simply lacking the ability to pay back their debt.
Cash is king
It’s clear that SMEs are strapped for cash, but why?
There’s no doubt that the consequences of Covid and the subsequent supply chain issues have ramped up the pressure on small businesses. A recent survey by CBI revealed that between July and October 2021, two-thirds of SMEs reported concerns that supply shortages would negatively impact their output over the next quarter – the highest figure in over 40 years.
It would be far too easy to label these challenges as an after-effect of the pandemic. In many ways, Covid-19 simply exacerbated pre-existing pain points. Principal among these is the issue of slow payments to suppliers.
Liz Barclay, the Small Business Commissioner, estimates that large corporates owe British SMEs £23.4 billion in late invoice payments. This problem has been worsened by the pandemic. Since the onset of Coronavirus, a report by the FSB revealed two-thirds of small businesses have been subject to late or frozen payments with no clear idea of when, or if, they will be paid.
Government-led efforts like the Prompt Payment Code, to which signatories join voluntarily, have failed to move the needle on the issue of slow and late payments. Even the UK Government’s own payment policy only mandates buyers bidding for government contracts to pay their suppliers’ invoices within 60 days – which is still 60 days too long.
On top of this, these requirements only apply to government contracts worth over £5 million. With Covid-debt owed by small businesses now worth over £47 billion, the liquidity challenges facing SMEs must be placed at the top of the agenda.
Turning to technology
So, how can banks and businesses unlock this working capital?
To truly tackle the issue of slow and late payments, the government needs to create a culture of day-one invoice payment and enable small businesses to access affordable and sustainable financing.
AI-driven solutions enable suppliers to get paid instantly. Machine learning analyses past payment patterns to make probabilistic assessments of the few invoices that are unlikely to get paid, enabling the rest to be screened automatically at the point of sale. The result is a win-win solution for all parties involved – suppliers receive much-needed cash, while buyers pay back on their normal terms and strengthen supply chains in the process.
This technology works by leveraging data from large corporates or other data sources, such as e-invoicing platforms and accounting systems. Where strong cash flows are identified using this data, SMEs can secure larger loans which are then paid back as they make revenue.
The burden of Covid loan repayments isn’t going away anytime soon, and is one of the most serious, yet largely overlooked pain-points hindering the growth of small businesses. As we head into what is likely to be a difficult period for SMEs, innovative strategies must be put in place to help small businesses adapt to an increasingly hostile economic climate.
This means moving away from traditional payment practices and leveraging new technology to tackle the long-standing cash flow issues that suppliers face. The adoption of this technology by governments and corporates will be crucial if SMEs are to access the cash they need to repay their Covid loans.