Finance · 25 January 2016

Small firms suffer over billions due in unpaid invoices

Lloyds Bank: Unpaid invoices are likely to become more of a problem in 2016

The UK’s small businesses are owed over £500bn in unpaid invoices from customers, an increase of more than 70 per cent in two years, according to new data.

The problem is likely to get worse in 2016, the research showed, with 30 per cent of small firms anticipating more customers will demand deferred payment terms in the next six months.

According to the latest commercial banking research by Lloyds Bank, a lack of understanding about appropriate alternative funding options could be holding small firms back. It found that the country’s small business community held combined assets worth £2.5tn that could be used to fund further growth – an increase of 220 per cent on 2014.

Head of product and propositions for Lloyds Bank global transaction banking, Stephen Everett, commented that firms need to be more open to the types of funding on offer. “Different types of funding such as invoice financing or asset-based lending can help unlock the working capital opportunities that exist at the moment,” he said.

“Nearly a third of businesses told us that late payments were affecting cash flow,” Everett added. “Failing to take advantage of alternative types of funding could be seriously holding back not only growth, but potentially stunting the growth of the entire supply chain beneath them.”

The bank hailed invoice financing as a good alternative funding option for small firms – allowing companies to access up to 90 per cent of an invoice’s value within a day of it being issued, therefore businesses gain greater control over accessible working capital.

Equally, asset-based lending enables companies to unlock value tied up in machinery or property to give access to working capital that can help them expand, acquire new equipment, or even fund an acquisition.

Everett added: “Unless businesses look at ways to unlock the value tied up in these assets, business growth and that of the UK economy are likely to be held back.”

Small businesses in the South of England were owed the most in outstanding invoices, with firms in Sussex, Surrey, Hampshire and Dorset all due £109,000 on average. Small businesses in Scotland expected to receive the least – around £79,000.

Firms in London and Essex were found to own the most valuable assets, at £670,000 on average per business, but owned the lowest proportion of those assets outright, at 72 per cent. Meanwhile, firms in Bristol, Somerset, Devon and Cornwall had the least valuable assets but owned a greater proportion of them outright, at 82 per cent.

Chasing unpaid invoices can be tricky business. Business Advice has some strategies that could help to ensure timely payment from now on.

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.