Why do we need invoice finance?

Pay up.

73% of UK SME’s have experienced late payment in the last 12 months and on average are paid 41 days later than the terms agreed.

This is despite moves to try to improve things like the Prompt Payment Code

The Prompt Payment Code (PPC) aims to improve the supply chain cash flow for UK firms by tackling the issue of late payment.

The Code is sponsored, hosted and administered by the Institute of Credit Management (ICM) on behalf of the Department of Business Innovation and Skills (BIS).

Code signatories undertake to:

pay suppliers on time

within the terms agreed at the outset of the contract

without attempting to change payment terms retrospectively

without changing practice on length of payment for smaller companies on unreasonable grounds

give clear guidance to suppliers

providing suppliers with clear and easily accessible guidance on payment procedures

ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers

advising them promptly if there is any reason why an invoice will not be paid to the agreed terms

encourage good practice

by requesting that lead suppliers encourage adoption of the code throughout their own supply chains

The Prompt Payment Code has the backing of the UK Government, the British Chamber of Commerce (BCC), the Confederation of British Industry (CBI), the Forum of Private Business (FPB), The Federation of Small Business (FSB) and the institute of Directors (IoD).

Financial software firm XERO issued the research, which revealed that:

Over half (52%) of UK business owners worry about unpaid invoices
Worst affected regions found to be London where businesses spend 1.5 days per month chasing payments, followed by 1.3 days by businesses in Wales
The business sector spending the most time chasing payments was found to be HR (3 days), followed by IT & Telecoms (1.8 days) and Manufacturing & Utilities (1.7 days)

It also showed that the two main reasons cited by small business as being the causes of late payments were that their customers were also waiting for payments themselves (32%), as well as a lack of consistency on payment terms (27%).

For SME’s understanding their Cash Cycle is critical as lack of cash flow will kill your business, here is a example of how to calculate the cash cycle

cash-cycle

This means that you need enough cash in your business to finance 50 days worth of sales. If your sales are £1,000,000 per year, you will need cash of £136,986. In practice, your business will probably need more cash available than this to pay for rent, rates, wages etc. You may also get cash spikes at the quarter end if you pay VAT.

Here is a brilliant Cash Flow Improvement Tool from NAB http://oms.nab.com.au/media/10/power_of_one/CF.html

This model quickly and easily calculates your cash cycle but also shows the effect of making improvements.

Having discovered what the cashflow cycle is, what can you do to improve it? well that depends, assuming you have agreed the best possible terms with your suppliers, you need to find ways to speed up cash received from Customers, if your business Sells to other businesses the first thing to look at is Credit Management.

CIMA have produce a comprehensive guide http://www.cimaglobal.com/Documents/ImportedDocuments/cid_improving_cashflow_using_credit_mgm_Apr09.pdf.pdf

But Credit Management may not be enough on its own, perhaps Invoice Finance might help?

Invoice discounting is an excellent, cost-effective way for certain businesses to improve their cashflow position.

Invoice discounting is most suitable for businesses with good financial controls in place and a strong financial background.
Invoice discounting is suitable for business with an established credit control department.
Invoice Discounting is suitable for a wide range of businesses including manufacturers, wholesalers, transport firms, employment agencies and providers of some business services.
Suitable businesses for invoice discounting are growing businesses because the level of funding grows in line with increasing sales.

In August 2013, the UK Government became a Buyer of invoices on the MarketInvoice Platform, investing directly in UK SMEs looking to access working capital and grow their businesses.

How does it work?

Any company can use MarketInvoice provided its sells goods or services to other large businesses.

Its a ‘pay as you go’ service.

Companies are vetted and the invoice must be to a large corporate not to other SME’s.

Its confidential so your customer will not know you have used MarketInvoice, if the customer doesn’t pay you will have to refund the investor.

There are other similar products on the market from other providers so its worth considering the options available.

Don’t let lack of cash flow kill your business!

steve@bicknells.net

Why don’t SME’s chase payment?

Is the UK doing enough to stop late payment?

Late payment kills businesses, it’s a fact.

Latest research shows that British SMEs are having to wait an average of 41 days longer than their original agreed payment terms before invoices are paid. (source: BACS)

Business and Enterprise Minister Michael Fallon said in an announcement released yesterday:

“Late payment causes real cash flow problems for entrepreneurs. It stops them from growing their business – we need to change the culture.

“Too many of our biggest companies are ignoring the Prompt Payment Code. My message to them is clear – make prompt payment a priority or face the consequences of being named. I’m confident that driving up support for the common sense principles in the Code will have a very positive effect.”

Currently 1,182 companies are signed up to the Prompt Payment Code. However, only 27 FTSE 100 companies and five FTSE 250 companies are signatories.

The Minister has written to all FTSE 100 and FTSE 250 companies. The letter urges companies to sign up to the Code, which will be four years old in December, and warns that the names of any companies that fail to do so will be publicised in the new year.

Code signatories undertake to:

	Pay suppliers on time
	within the terms agreed at the outset of the contract without attempting to change payment terms retrospectively without changing practice on length of payment for smaller companies on unreasonable grounds

	Give clear guidance to suppliers
	providing suppliers with clear and easily accessible guidance on payment procedures ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers advising them promptly if there is any reason why an invoice will not be paid to the agreed terms

	Encourage good practice
	by requesting that lead suppliers encourage adoption of the code throughout their own supply chains

http://www.promptpaymentcode.org.uk/

Last month the EU also launched a late payment campaign:

Every year across Europe thousands of Small and Medium Enterprises (SMEs) go bankrupt waiting for their invoices to be paid. Yet late payment of bills is often seen by many as a perfectly acceptable practice. To end this damaging culture of late payment in Europe, European Commission Vice President Antonio Tajani launched today (5^th October 2012) in Rome an information campaign across all 27 EU Member States and Croatia, to encourage speedy incorporation of the Late Payment Directive into national law, even before the absolute deadline on 16th March 2013.

The new rules are simple:

Public authorities must pay for the goods and services that they procure within 30 days or, in very exceptional circumstances, within 60 days.
Contractual freedom in businesses commercial transactions: Enterprises should pay their invoices within 60 days, unless they expressly agree otherwise and if it is not grossly unfair to the creditor.
Enterprises are automatically entitled to claim interest for late payments and can able obtain a minimum fixed amount of €40 as a compensation for payment recovery costs. They can also claim compensation for all remaining reasonable recovery costs.
The statutory interest rate for late payment is increased to at least 8 percentage points above the European Central Bank’s reference rate. Public authorities are not allowed to fix an interest rate for late payment below this threshold.
Enterprises can challenge grossly unfair terms and practices more easily before national courts.
More transparency and awareness raising: Member States must publish the interest rates for late payment so that all parties involved are informed.
Member States are encouraged to establish prompt payment codes of practice.
Member States may continue to maintain or to bring into force laws and regulations which are more favourable to the creditor than the provisions of the Directive.

The new measures are optional for enterprises, insofar as they acquire the right to take action but are not obliged to do so. In some circumstances, a business may wish to extend the payment period for some days or weeks to keep a good commercial relationship with a specific client. But the new measures are obligatory for public authorities. They should lead by example and show their reliability and efficiency by honouring their contracts.

Businesses are at risk of failing due to liquidity problems. A recent survey reveals that the written off debt suffered by Europe’s businesses has grown to 2.8% of total receivables, to reach the unprecedented level of €340billion, a figure equalling the total debt of Greece, representing one third of total annual healthcare spending across the EU’s 27 countries and amounting to more than double the EU’s total 2102 budget of €147 billion. And there is also a divide between the north and the south which is severely hampering the integration of the EU’s single market: it takes an average of 91 days for B2B transactions to be paid in the southern region, as compared to an average of 31 days in the north.

The Late Payment Directive 2011/7/EU is crucial for the completion of the single market and for restoring normal lending to the economy. The Directive must be transposed into national law in all Member States by March 16 2013.

http://www.eubusiness.com/topics/sme/late-payment-12

steve@bicknells.net