iwoca: the heart of the recovery

As the pandemic leaves many small businesses doubting whether they will survive into 2021, Rob Jones (pictured), co-lead of iwocaPay, reveals how fintechs are becoming the heart of the recovery

About iwoca

iwoca is unlocking economic growth by expanding the financial possibilities available to small business owners. Since launching in 2012, iwoca has made funding available to 50,000 businesses and has raised more than £400 million in equity and debt finance.

FinTech Intel: How would you characterise small business cash flow pre-crisis? And access to trade credit?

Rob Jones: Pre-crisis, the small business sector battled lost productivity and late payments. At the best of times, strained cash flows and unreliable liquidity stifle small businesses’ abilities to invest in their operations and capabilities. At worst, strained cash flow drives small businesses out of the market. UK small businesses spend 56.4 million hours per year chasing payments, according to QuickBooks.

One major culprit causing this inefficiency and straining cash flow is a power imbalance at the point of purchase. This is particularly the case for business-to-business (B2B), where businesses are more susceptible to the trade credit risk inherent to offering longer payment terms. According to our recent survey, those operating in the B2B sector are more than twice as likely to give a customer more time to pay than a business operating in the business-to-consumer (B2C) sector. As such, businesses operating in the B2B sector have to manage the cash flow gap between delivering a service and getting paid.

FinTech Intel: How did the pandemic change things?

Rob Jones: As you can imagine, the pandemic has changed things dramatically. More than a third (37.5%) of small businesses we surveyed mid-pandemic reported they hadn’t made a new sale in the last 30 days. In contrast, pre- crisis, nearly 100% of actively trading businesses told us they were operating with at least one sale per month (and nearly 60% had at least 15).

Not only has business stopped, but many businesses haven’t been paid for goods and services they’ve already delivered. This is particularly true for B2B, where customers get long payment terms. Our research found that 40% have more than £10,000 of outstanding invoices and although 68.5% of these businesses are still confident that customers will pay them, they’re not sure when.

Solvency is also a major concern and nearly a quarter (23.7%) of all respondents said they’re not confident their business will make it to 2021.

In the immediate term, small businesses are doing whatever necessary to ensure they’ll be ready to turn the lights back on as the lockdown eases. Ninety percent of respondents told us they have had to take some kind of action to stabilise their businesses during the lockdown. But even as businesses take substantive measures to shore up their short-term survival, liquidity remains the thing that keeps them up at night.

FinTech Intel: Did the pandemic catch incumbent trade credit providers off guard? If so, why?

Rob Jones: The pandemic has of course caused a global economic shock and in some industries forced a completely unexpected and unprecedented emergency-stop. Providers of trade credit, whether it be banks, alternative lenders or indeed businesses that normally give their customers time to pay for the goods and services they are purchasing with net payment terms, will have already, or be in the process of, evaluating their policies as to who and what credit terms they can offer going forward.

Government support in the UK has been necessary to sure-up businesses of all shapes and sizes, as was demonstrated with a £10 billion guarantee initiative announced in May for trade credit insurance. Existing alternatives such as invoice finance and trade credit insurance only partially address the imbalance between suppliers and customers. While invoice finance solutions help suppliers access cash, suppliers still bear the risk of non-paying customers in most of these solutions.

In contrast, trade credit insurance guarantees the invoice, but the claim payout can be anywhere from 60 to 120 days after the invoice went delinquent, leaving suppliers with another cash flow gap. Neither solution has a track record of adequately addressing the needs of the small B2B market. 

FinTech Intel: How is iwoca working to relieve pressure on small businesses?

Rob Jones: We’re now accredited to the UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) and focusing on helping small businesses get back to work. It’s clear the problem with payment terms is a major impact on a business’s cash flow, but providing customers with an option to pay later or spread their cost is a powerful sales tool for suppliers.

This is why we’re launching iwocaPay—built specifically for small businesses, it gives suppliers all the advantages of payment terms, while mitigating the risk and inefficiency of chasing payments. Suppliers get paid up front while customers have an easy financing tool to spread the cost of their purchases, making payment terms more balanced for both suppliers and their customers. 

FinTech Intel: Post-pandemic, and once state-backed schemes such as CBILS end, what role will fintechs such as iwoca play in supporting small businesses?

Rob Jones: Our focus is in helping small businesses thrive and survive, supporting them with finance where and when they need it. Our mission remains to fund one million small businesses. We want to get the UK back on track—iwoca is built to fix this exact problem and will continue to do so.

The fintech community in particular is able to scale fast and as a group has already supported more than 400,000 small and micro businesses with finance, representing 30% of all small- and medium-sized enterprise lending. Fintechs have the ability to get money to exactly where it is needed within hours, not weeks. We want to be at the heart of this recovery for small businesses not just this year, but for many to come.

Image: iwoca

Mark Dugdale