So Wonga
has entered the business loan market and added to what is already a fast and
dramatically changing landscape. The introduction of services such as Funding
Circle and MarketInvoice have already had a big impact on how businesses can
source finance and the recent Breedon Report recognised that alternative
funding sources are here to stay. Couple that with last week's Bank of England
Trends in Lending report which said….. "The annual rate of growth in the stock of lending to UK
businesses was negative in the three months to February. The stock of lending
to small and medium-sized enterprises continued to contract….." and you can see why Wonga might sniff an opportunity. I'm
not sure Wonga is a good solution for small businesses strapped for cash but
it's little different to a small business owner funding his business using a
personal credit card or two, and that's been happening for years.
What
worries me more is the suggestion touted in the media and elsewhere that
solutions like MarketInvoice are a cure for late payment. They're not.
MarketInvoice allows a business to sell invoices to
a network of institutional investors and it can release the capital tied up in
those invoices in real time. In the short term it can therefore address the
cash-flow problem caused by late payment but it's not a cure. Payment still has
to be obtained and, if the invoice is not eventually paid, the amount will have
to be refunded to the investor.
The
problem as I see it is that – having obtained funding against the invoice(s) -
the business owner has removed the immediate cash-flow hole caused by
non-payment and can focus attention elsewhere. The problem hasn't gone away
though, and if there is a fundamental problem preventing payment it still needs
to be resolved. Let's not forget, and let's make sure that small businesses
don't forget, that the best way to avoid late payment is to get the basics
right: knowing your customer, agreeing payment terms in advance, invoicing
correctly and promptly, and chasing payment immediately it becomes overdue.
Anything that slows that process, or distracts from it, could lead to far more serious
problems; timing is all-important in the management of cash-flow and collection
of amounts due and, while attention is elsewhere, the slow-paying customer
could fail and become a bad debt rather than just a late payer.
Cashflow
keeps business in business and good credit management is vital to maintaining
that cash-flow. Mixing messages is not helpful.
Hi Philip,
ReplyDeletethanks for your invitation to debate the issue.
Whilst we do absolutely see ourselves as a solution to the problem of late payment, you are right to point out that we are not a solution to non-payment. I think there's multiple issues at work here, and we need to draw a subtle distinction between the sort of late payment which arises from disorganization on the part of business owners (which, as you correctly identify, can be minimised by good management), and the sort of late payment which arises as a natural consequence of being an SME supplier to large corporates.
Every day, I get calls from business owners telling me that longer and longer payment terms are becoming the norm - 90 days is rapidly becoming standard in most industries, with terms in some outliers like construction being even longer. Often, the exceptionally savvy FDs at huge firms will use long payment terms as a stick to beat down prices, looking for substansial discounts in return from shorter payment terms - supermarkets in particular are notorious for this. They have realised the power they hold, and frequently employ it, to the detriment of SMEs. No matter how well a business owner dots his "i"s and crosses his "t"s, the power disparity between a global corporate and a small supplier means that it's very hard to dispute these terms, yet SMEs still need a way to cope.
Even if you are dealing with late payment, rather than long payment, many business owners tell me they feel they can't risk offending their biggest, most important client by phoning up and being brusque on the phone with them; indeed, heavy-handed attempts at collection & enforcement (especially by third parties) often backfire. Government measures - such as the automatic levying of interest on late payments - are also unpopular with SME owners, as most rely on rising your price, which will often make your business uncompetitive compared with rivals who are willing to take the late payment hit.
The final issue I'll raise is one of growth; even if readers follow your sound advice, and manage their businesses prudently, the fact that they will be waiting on long payment terms will often retard their growth. Especially in very fast moving industries - in particular, sectors like App Development, which have only been around for a couple of years - waiting for three months for a big client to pay can be a huge drag on their ability to take on new staff, or move up the ladder, dealing with bigger and bigger clients. A huge part of the economy is predicated on the notion that entrepreneurs can accelerate their ambitions by using credit sensibly; SMEs shouldn't be putting off their growth plans to appease the large customers insisting on these terms.
While your advice about good credit management is absolutely spot on, late & long payment are absolutely here to stay, and a fact of life even for the best-run businesses. We see ourselves as providing those well run businesses with working capital and cashflow, which hasn't been satisfactorily filled by existing players in the market.
Anil Stocker,
Co-founder,
MarketInvoice