Is there a solution for SMEs struggling with lengthy payment terms?

Large companies that impose lengthy periods of ‘end of month plus 90 days’ for invoice payment present a dilemma for small businesses.

On the one hand it may bring in large orders and be good for their reputation as a supplier to a well-known large brand. On the other hand, however, the lengthy wait for payment can cause serious cash flow difficulties.

Large companies are getting away with imposing such terms despite being named and shamed, the latest being beer company AB InBev (payment in 120 days) and Heinz (payment extended to 97 days).

In an attempt to hold companies to account, the Federation of Small Business (FSB) has called for a compulsory code committing large companies to displaying their maximum and average payment terms.

While we can certainly sympathise with the outrage over this behaviour and agree with FSB’s request that firms disclose their longest and average payment terms, there are ways that SMEs can fund themselves while they wait for payment.

Apart from an overdraft or loan secured against assets such as the sales ledger the obvious solutions are factoring invoices (selling debt) or invoice discounting (borrow against invoices). There are other sources that can help fund working capital such as credit to customers. These include the alternative and online funding markets that have a number of sales ledger and single debt offerings including the prospect of selling or borrowing against as single invoice. Another solution is trade finance, although quite specialist it is useful for funding large transactions and especially useful for SMEs when they get a large one-off order.

K2 publishes a Business Finance Guide covering a wide range of options for business finance, available free through the Knowledge Bank on our website

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