New research has found that half of UK SMEs are being paid later than usual, and a third are struggling with bad debt due to customers failing to pay. As businesses exhaust the funding that is available from BBLS and CBILS and Government furlough schemes end, businesses will inevitably be strapped for cash. SMEs’ awareness of alternative funding sources is going to be crucial for sustaining positive cash flow in the coming months.  

What is alternative financing?

The good news for small businesses that are struggling due to the crisis is that there are more funding options available than ever before. Digitisation has created the necessary transparency around credit risk to make external finance affordable for SMEs. Funders no longer have to compensate for uncertainty with elevated premium prices. There are also a plethora of alternative financing options available, including peer-to-peer lending and invoice financing, and some funders cater explicitly for the needs of SMEs.  

Unlocking finance with invoice insurance

After the financial crisis in 2008, it took seven years for lending to SMEs to return to pre-crisis levels. A high risk of customers defaulting on payments naturally made the business community (including funders) uncomfortable with offering credit. The resulting constraint on credit or ‘credit crunch’ hampered economic recovery at exactly the time when growth was needed most.

The difference this time around is that SMEs have access to the aforementioned alternative financing solutions, and a variety of other pioneering  financial services. In a market in which a third of businesses are failing to pay on time or at all, Nimbla allows small businesses to insure individual invoices, or their whole ledger against customer defaults. Businesses can then fund those invoices to ensure that cash flow remains strong enough to enable pivoting and growth.

Fintech and the future  

Right now, SMEs have a huge opportunity to capitalise on new financial services to help them through the downturn. Real-time payment and transaction data has enhanced credit scoring and made financial services that had previously only been available to corporate businesses accessible to SMEs. But fintech is changing that by offering new products and lending models that are flexible, affordable and better equip SMEs to grow.

In uncertain trading conditions, credit score insights like those offered by Satago and Nimbla can be critical to a business’ success or failure. The businesses that will survive and even thrive in this crisis will be those that harness fintech in service to the ingenuity that has always been a core strength of small businesses. We will see more insolvencies in the next few months, but SMEs are more agile than corporates, and can still use this advantage to pivot effectively.

Even as businesses exhaust BBLS and CBILS, the increased demand for new forms of SME lending could pave the way for further price reductions. In the future credit scoring will be richer still, reflecting real-time shipment data, satellite imaging and macro trends. And giving innovative SMEs access to company credit insights and finance could help to position the UK as an international innovation hub. Over the next few months, uptake of new financial products is likely to be business-critical for small businesses, and the economy.  

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October 6, 2020