Small IT companies are at a higher than average risk of going under as a result of customers paying them late.
Almost a third (32%) of the 1,000 small IT firms surveyed by invoice payment firm Tungsten have faced the risk of closure due to late payment, compared with 25% of small to medium-sized enterprises [SMEs] as a whole.
The research found the average small business is owed £40,857 in unpaid invoices and around half (£20,937) is overdue. If applied across the 5.2 million small businesses in the UK up to £212bn is owed.
“These figures are a telling reminder of the challenges faced by SMEs in this country,” said Richard Hurwitz, CEO at Tungsten.
“An unpaid invoice can mean the difference between a successful month of trading and a dangerous financial shortfall. In the worst case, it could lead to insolvency,” he said.
According to Tungsten, the issue was most acute in the technology sector.
“The creation of the role of small business commissioner shows the government is taking the problem seriously, but it’s clear there’s work still to be done to ensure SMEs are paid in a timely fashion,” said Hurwitz.
As well as leading to bankruptcy, late payments starve the UK economy of investment as SMEs – which make up a large chunk of UK economy – hold back spending because of cashflow problems.
Hurwitz said advances in technology mean many payments can be processed electronically, but e-invoicing was only used by a quarter of the small businesses in the survey.
“If companies adopt a modern approach and investigate alternative finance options, coupled with ongoing government support, we can make these business practices a thing of the past,” he said.
Companies are providing alternative financing through technology platforms. For example, MarketInvoice, which set up in 2011, buys invoices from businesses through funds provided by investors. The investors receive an agreed percentage of commission when the loan is made and then get the money back when it is repaid.
The government is an investor through the British Business Bank. The bank, established by the government, lends money to SMEs by buying their invoices and makes money through commission. The Greater Manchester Authority also invests in it to provide credit to local SMEs.
MarketInvoice’s system carries out risk checks on a business with an invoice and then offers its creditors the chance to invest in the invoice, based on the assessment. It can have funds from an invoice available to an SME within 24 hours.
Read more about technology enabled alternative financing
- A platform enabling suppliers to bid to receive payment for their invoices early has set itself an ambitious target following acceleration in demand.
- UK government-backed peer-to-peer lending platform MarketInvoice moves to a Microsoft Azure-based platform as a service to cope with increasing demand.
- Peer-to-peer lending accounted for more than £1.2bn of UK loans in 2014, with confidence growing in IT-enabled access to credit.