From XU Magazine, 
Issue 25

Fintech and the second wave

How technology can help businesses survive the challenges ahead

The burden of late payments on small businesses stands at a staggering £23.4 billion, according to Government figures. Satago CEO, Sinead McHale explains why fintech has the solution...
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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The Government recently outlined plans to protect small businesses from late payments by giving additional powers to the Small Business Commissioner.  

This action follows mounting pressure from organisations such as the Federation of Small Businesses (FSB), as the burden of late payments on small businesses rose to a staggering £23.4 billion, according to Government figures.  

Whilst any acknowledgment from the Government of the burgeoning cost of late payments on our economy feels like a step in the right direction, it’s hard not to feel a sense of déjà vu. Haven’t we been here before? Didn’t the previous chancellor promise last year and the year before to take definitive action against poor payment practices? And yet today, late payments remain one of the biggest threats to small businesses in the UK.  

The pandemic has, of course, accelerated the issue. The FSB estimates that 62% of UK businesses have suffered late or frozen payments as a direct result of COVID-19.

As businesses feel the pressure and up to three million people face unemployment, one thing for certain is that we cannot rely on Government policy to reverse this trend. Instead, businesses must use the resources available to them to protect themselves from risk and improve their cashflow.  

If they do not, they could face serious consequences.  

Assessing risk

The last time the UK faced a recession of this severity was after the 2008 financial crash. Back then, with cloud accounting still in its infancy, it was harder for small businesses to get an overview of their clients’ payment practices. For many businesses, assessments were made through word of mouth, if at all.  

Fast forward 12 years and open banking, accounting software and sophisticated credit checkers have integrated to ensure that any business, no matter how small, can access client information at the touch of a button. And yet, surprisingly many still fail to do their due diligence before agreeing payment terms.    

If there’s one lesson to be learned from the situation we find ourselves in, it’s to be careful with whom you do business. Especially in the current climate, when even well-established companies are feeling the strain. If your business secures a new customer, make sure they have the ability and the willingness to pay their invoices when the time comes. If they don’t, don’t offer them sale on credit, even if it means losing the job.  

These are tough decisions to make, especially at a time when work is scarce and securing a contract, any contract, can feel like a lifeline. The decision to supply goods and services to another business on credit should be taken with the utmost care and with all available information to hand. If your business hasn’t used risk insight technology before, now might be a good time to invest.  

Modern risk tools give you more than just a credit score. They will integrate with your accounting software and dig deep into a client’s payment history, telling you about their average days beyond terms, offering you a suggested credit limit and notifying you when an invoice becomes overdue or a customer breaches their credit limit.  

This level of insight is invaluable to business owners and could prove crucial in the months to come.

Accessing finance  

The second concern for any business during a recession is the lending market. As a rule, recessions cause banks to tighten their restrictions, leaving start-ups unable to access the funds they need to grow. The Government backed Coronavirus Business Interruption Loan scheme (CBILs) and the Bounce Back Loan scheme (BBLs) have served to delay the inevitable belt-tightening, but with these schemes ending imminently, entrepreneurs and small business owners may feel a sense of foreboding.  

Here again, tech can help. Following the 2008 recession an explosion in alternative lending, facilitated by open banking, led to a shift in the lending market. Where once there was only one route to accessing finance, now there are several.

From peer-to-peer lending schemes to invoice finance, alternative lenders will play a crucial role in levelling the playing field for businesses looking to obtain finance in the months to come, especially as Government schemes wind down.

As well as making finance more accessible, tech can make it more efficient. Online credit and risk checks make it easier for lenders to determine the eligibility of their clients fast, making drawdown times that much shorter. During a crisis period, when time is of the essence, these efficiencies will prove essential.

There are tough times ahead, but for anyone looking for a silver lining, recent advancements in finance technology mean we are better positioned than we have ever been to face the coming challenges.

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