London-based lendtech iwoca has launched a new payment tool to give confidence back to businesses grappling with the fallout of the coronavirus (Covid-19) pandemic.
The pandemic is creating a trade credit crunch as many businesses face considerable unpaid invoices leading as many as one in four to doubt they will survive into 2021, according to a new report from iwoca.
The research explores how payment terms were managed pre- and post-pandemic and sets out a series of recommendations that policymakers and small businesses should prioritise in the months ahead.
As non-essential shops open in the UK, the mounting pressures on small businesses are leading as many as a third of owners (who offered payment terms) to consider reducing or not offering trade credit in the future as they try to minimise their exposure to unpaid invoices.
A fall in access to trade credit, which according to the SME Finance Monitor over a third (37%) of businesses use, could have significant consequences for small businesses that rely on it and the wider sector.
The findings come as iwoca also launches a new product that will help businesses navigate the crisis. The tool, iwocaPay, can take the risk out of payment terms and give confidence back to businesses offering trade credit.
It gives customers a choice over when they make repayments, allowing them to choose payment terms of up to 90 days. At the same time, suppliers will be paid immediately through iwoca.
Addressing the needs of both business customers and suppliers will help improve cash flow and give greater confidence to small businesses as they return to work in the coming weeks and months.
The main elements creating the trade credit crunch include:
The proportion of small- and medium-sized enterprise (SME) owners that owe large payments to their suppliers has nearly doubled. Small business customers of iwoca reported that their amounts owed to suppliers have risen since the pandemic hit. Some 6.3% reported owing between £20,000 and £50,000—almost double the proportion from last year (3.7%). A further fifth of small businesses in this survey reported that they currently owe their suppliers between £1,000 and £4,999 —up from 13.8% at the same point in 2019.
At the same time businesses are asking for longer payment terms from suppliers. With the pandemic taking its toll on sales, small businesses appear to be trying to hold off on making payments to protect their liquidity. The research found that in the past 30 days, two fifths of respondents (41%) asked their suppliers to extend payment terms to give them more time to complete a payment. By comparison, in the year leading up to the outbreak of Covid-19, only one quarter (27%) had requested longer payment terms.
But as suppliers haven’t been paid and are being owed almost twice the amount already, they are demanding payment up front or shorter payment terms. As a result of the challenges caused by the pandemic, one third of small business suppliers (34%) said they are more likely to either ask for immediate payment or shorten their payment terms in future. This could result in a trade credit crunch, as suppliers demand earlier payments from small businesses who increasingly require longer payment terms.
Christoph Rieche, co-founder and chief executive officer of iwoca, said: “What’s emerging is a concerning game of ‘tug of war’ between small businesses as they look to survive and plan for the future. Buyers can’t pay their invoices because they don’t have the revenues and sellers are being asked to provide longer payment terms to ease the strain whilst already sitting on a growing backlog of unpaid invoices.”
“Coronavirus can and should help trigger a step-change for small businesses to become more efficient, productive and resilient. We believe the first and most obvious change is to make payment terms fairer between suppliers and customers.”