If the experiences of recent years, and in particular the last year, have taught us anything it’s that we must all be more prepared for business interruptions and crises.

The importance of building financial stability amongst UK SMEs must be part of an action plan to protect the overall UK economy. Through strengthening the financial fitness of SMEs, who make up 99% of businesses in the EU, we prevent financial fragility from becoming a systemic issue for the country as a whole.

SMEs fall first in a financial downturn

In a financial crisis, SMEs tend to be the first to feel the pinch but their struggles perhaps don’t hit the headlines with as much impact as they should, compared to those well-known larger concerns that teeter then fall with a much larger register in the collective conscious. 

The effects of the current financial downturn have of course been felt across business as a whole, but more acutely by small to medium-sized businesses as a result of various factors with trading decline bolstered by support packages.

Often punitive payment terms imposed by larger corporations, even in the best of times,  have been responsible for pushing SMEs into the red and though we found generally payments remained robust in the first lock down, will this continue to be the case if matters continue over an extended period?

Delays in sales income combined with the effects of the continuing global pandemic and resultant recession (albeit hopefully short term) have put the wallets of small businesses in a vice. Mass chaos in the supply chain and trading restrictions have meant that, despite valiant efforts of the chancellor to bolster UK plc, the effects of multiple lockdowns and extensive business interruption have created the threat of an epidemic of business failures to rival the threat of COVID itself.

A lost generation of new businesses?

In September, it was revealed that the number of start-ups filing for administration in the UK was at its highest level in over a decade. Data from Plexal and Beauhurst showed, not surprisingly,  that the impact of COVID-19 had taken its toll on new businesses survival prospects.

Additionally, there has been a reduction in investment capital into start-ups, with an 18% year-on-year reduction in the amount of investment capital new businesses have raised for the same period in 2019.

We have discussed on numerous occasions how the success of start-ups and established SMEs along with the encouragement of entrepreneurs are critical for the countries economic survival. It is these businesses that will provide the innovation and stimulation to the jobs market that is needed to pull us through economic recovery- the vitality and tenacity in turning their business models around during 2020 was inspirational and shows just how vital they are.

Why are SMEs most vulnerable to the effects of an economic downturn?

By their nature SMEs tend to be structurally weaker without assets and cash reserves to fall back on and in recent history, many SMEs have been focused on achieving improvements within an elusive metric that’s all about reducing costs whilst maximising profits – efficiency. Being as efficient and as lean as possible has meant that businesses are increasingly vulnerable to change and supply-chain disruptions (“Just in Time” from China suddenly ceased to be that). As margins for error decrease, so does the impact of errors increase.

The 2008 financial crisis and recent years of uncertainty had made traditional borrowing (and indeed many traditional businesses) less available or even less preferable. Punitive requirements, a seeming lack of understanding or willingness to assist, slow turn around and lack of personal service became a feature of the offerings from many mainstream lending institutions and it is no wonder that this led to the rise of alternative finance.

As we’ve already mentioned, the combination of onerous payment terms from larger, more bullish buyers alongside this lack of access to borrowing had already stretched SMEs to the limit. Then along comes an unforeseen global disaster, blanket trading restrictions and a financial crisis. It’s all likely to push many – too many – over the edge, despite the volume of government backed loans provided and the current hiatus in insolvency proceedings.

Government support must continue but you have other options too

Currently propped up by various government schemes and with mass unemployment avoided by retaining staff on furlough schemes, many businesses are not quite on the edge, but the precipice is inching ever closer.

While the government has a huge part to play in providing maximum assistance in trying to minimise the necessary/imposed trading restrictions and national lockdown measures, large organisations must also identify and provide assistance to smaller suppliers who are in the at-risk category. 

SMEs will not get there by relying on bailouts and leeway alone but there are steps that SMEs can take themselves to reduce their financial fragility.

First, undertaking a more proactive approach to managing working capital is a fundamental step that any small business should be taking to ensure they have the financial wherewithal to survive what is still to come. This requires reviewing product lines and routes to market reducing overheads wherever possible, (really tightening belts), but remaining sensitive to the greater good and survival of the supply chain.

Many businesses have found themselves with gaps in the supply chain, but equal numbers will be in the unenviable position of having surplus inventory. Often there can be a feeling of comfort in being well stocked, but when capital is tied up in inventory, warehousing overheads increase and cash pressures remain with the danger of obsolete or unfashionable stock reducing the value of potential future sales. Reduce inventory where practical and appropriate.

As we discussed last month, recovering debt right now can be quite tricky and sensitive, but it’s increasingly important to close down on payment terms and put pressure on debtors to speed up the collection process. At least, increase contact and communication with debtors and ensure you are in the forefront of their minds when it comes to getting paid as soon as it becomes possible. See our guide to post-COVID debt recovery from last month.

You can of course consider extending your own payables, taking longer to settle your creditors but It’s never really a good idea to do so without a frank and honest discussion and don’t be surprised if your supplier does not rush to help you next time with an urgent order when they don’t know when, or if , they will be paid.

Much like we all need to work together and act with consideration for the safety of our neighbours in terms of living with COVID-19, we must act with integrity and consideration for our suppliers as we navigate the ensuing economic fallout. But, of course, needs must. And where cash flow can become critical, your own business’s survival is paramount.

As always, we would far rather help your business to achieve financial stability through a pro-active positive approach of increasing access to working capital at all times.

When you aren’t in the position to ask debtors to provide you with more favourable terms or they will do so but at the expense of your margins by demanding discounts, and you don’t want to put your vendors in the same difficult position, invoice finance can offer a solution that can ease open the jaws of the vice to re-enable your business, a facility that grows with your own sales line ensuring you have the cash you need, when you need it without being at the mercy of when your customers decide to pay.

Our Invoice finance options are available for start-ups, family businesses and those with limited trading history as well as established SMEs.

To discuss your current situation and how our funding solutionscould help your business overcome financial fragility and achieve stability, please do get in touch.