Vicki Taylor, Director of Debt Finance at Growth Lending, provides SMEToday’s readers with a breakdown of the cash flow issues currently gripping SMEs in the UK and the alternative funding streams available to them away from the world of traditional lending.

 SMEs are struggling to stay afloat, let alone thrive, in a post-lockdown economy plagued by inflation woes and
geopolitical instability. Amid such a turbulent time for UK businesses, cash flow is more important than ever.

But cash flow continues to be a source of frustration for SMEs in sectors across the UK, and many are unaware of the alternative lending options that are available to them to help bridge the gap in their finances and enable their business to flourish.

SMEs and cashflow – the data

 We recently surveyed UK SMEs across a range of sectors and the results painted a stark picture of their cash flow problems.

According to the report, almost three-quarters (73%) of SMEs experience late payments from their customers. For some businesses this is a much more frequent occurrence, with one third (33%) experiencing late payments on at least a monthly basis.

While any late payment can have a significant effect on a business’ cash flow, many must grapple with late payments of highly significant sums too.

Of the businesses surveyed, two-thirds (67%) of their late payments were worth up to £50,000. Staggeringly, 9% of late payments were worth more than £1 million – significant sums that leave businesses with a huge hole in their finances.

Traditional versus alternative lending

 The banks may be the first port of call for SMEs affected by cash flow issues, but a traditional loan can now be harder to attain, as the banks respond to the current economic climate with decreased lending appetite. These lenders have tightened their eligibility criteria and it appears they often favour existing clients or established businesses over SMEs. As our data shows, trust and willingness to work with traditional banks is falling among small to medium-sized businesses.

Of the SMEs surveyed, 30% are less likely to borrow from traditional banks than they previously might have. When asked why, 29% of respondents said their trust had been eroded by the way banks had treated firms during the Covid-19 pandemic. Events such as the 2008 financial crisis had also contributed to a lack of faith in traditional banking.

Almost a quarter (23%) of those surveyed also said the terms from traditional banks are unsustainable for their business. While bank loans may work for some businesses, it is not the only option available to SMEs, nor is it always the best.

One alternative form of funding SMEs can explore is invoice finance. This form of lending enables a business to secure an advance on an outstanding invoice, usually between 80-90% of the value of the invoice or invoices, which can support cash flow by minimising the amount of time a business spends out of pocket.

Another non-traditional form of lending is asset-based lending (ABL). This form of lending uses assets as security against the loan and applies to things like stock, equipment, machinery and property. Unlike other forms of lending, asset-based lending is only available to businesses.

The question of debt

While there appears to be a lack of awareness around non-traditional lending methods among SMEs, there also seems to be confusion over the link between debt and business growth. While personal debt is often shrouded in negative connotations, debt can help a business to grow by funding product development and team expansion.

While there is, of course, risk associated with taking on any debt, often it can have a positive, wider impact on business growth and allow an SME to scale up. One-fifth (20%) of the respondents in our research see debt as a necessary part of growth.

But while some businesses are keen to secure funding, others are wary. Our research found that a huge 61% of businesses are unwilling to “get into debt” and cite this as their main reason for not raising finance.

However, it seems the younger generation see debt as a necessary part of growth, with 26% of the 18-44 age bracket surveyed agreeing they perceive business debt in this way. In contrast, only 8% of those aged 55-64 believed the same, meaning the younger bracket are more than three times more likely to think debt is a necessary part of growth.

Awareness of alternative funding

While there are plenty of options away from the traditional lending sources that SMEs can consider when looking for funding, data suggests more awareness is needed.

Of the UK SMEs surveyed for the ‘Don’t Bank On It’ report, 27% said that there is a lack of education available around alternatives to traditional lending. Almost half (49%) of firms said that despite the scale of the late payments problem, they were not aware of invoice finance as a form of funding.

How SMEs are approaching funding for growth

Many of the businesses surveyed are seeking alternative avenues over the traditional bank loan to promote growth, with one quarter (25%) looking for private investment. 17% of businesses are planning to grow using invoice finance, while fears around the current environment hold back almost a third (32%) of SMEs from seeking external investment.

Just shy of a fifth (19%) of SMEs are trying to raise funds to cover increased overhead costs.

What is clear from the findings is that there needs to be a greater understanding among the UK’s SMEs of the lending options available to them, both traditional and non-traditional, which can help their business to thrive in the midst of such an uncertain economic backdrop.