How banks and fintechs can lead an SME generated economic recovery

By Bryan Walker, Head of Bank relationships at fintech Previse, explains how banks and fintechs can work together to deliver much needed support to SMEs as they struggle to stay afloat and the role prompt payments can play in contributing to economic recovery.

The pandemic has required governments across the world to step in and provide support to business in ways that have never been required before. None have felt the impact of Covid-19 more than SMEs. Severe pressure on cash flow caused by falling demand and strains on their working capital cycle, have left SMEs no choice but to draw on government backed programmes such as the UK’s CBILS scheme.

New research from the Institute of Directors shows that two in five businesses are now facing an increase in overdue commercial debts, with nearly one in ten stating that late payment problems had become significantly worse.

One in six smaller firms now relies on government-backed debt and clearly this intervention is propping up businesses, especially SMEs – both those that are viable and inherently unviable. Insolvencies in the UK for example are down 30%-40% since the pandemic began in comparison to prior years.

The problem with help

UK quarterly borrowing hit a record high in July last year, at £127.9 billion, twice the total amount borrowed the year before. While the economy clearly requires emergency support and will continue to need stimulus to speed up recovery, it is clear that this level of spending cannot be sustained indefinitely.

Bryan Walker

Government schemes may have shielded SMEs from the worst effects of COVID thus far. However, the repercussions down the line will be far greater and not only impose a burden on SME cash flows, but also restrict their ability to take further debt onto their balance sheet in the future.

SMEs account for 99.9% of the business population and around half of the turnover in the UK private sector. They are often the lifeblood of an economy and it is clear that getting them back to trading and recovery will require additional capital.

Once the covid-related government funding stops, and businesses face the reality of rebuilding the economy, some SMEs will face gaps in their finances. Focusing on making their working capital position as healthy and strong as possible is going to be essential.

A concerted, collaborative effort

Banks have an important part to play in this cycle and can change financial markets for the better. By helping their clients to access cash locked in the working capital cycle as early as possible, businesses can trade from a stronger position. Data makes it possible for a business to access cash as soon as their invoice is issued, removing the wait for lengthy payment terms and the uncertainty of whether the payment will be made on time. A bank can provide this capital with very strong risk controls on where and when the repayment will be made.

Large banks are growing increasingly aware – if they are not already – of the power that data can bring to their operations and are open to collaboration with fintechs to facilitate this. This is a two-way process, with fintechs vying to partner with banks, too. The combination of fintechs’ technology offerings along with incumbent banks’ proven platforms can prove a powerful coupling when it comes to getting the most out of data.

The amount of money currently trapped in invoices waiting to be paid would constitute a substantial boost to the UK economy. According to Pay.UK, in 2019, late payments to suppliers alone amounted to over £23 billion. This figure will likely have risen since the pandemic.

Using a rigorous risk control framework to release capital from invoices waiting to be paid can make businesses more resilient and strengthen supply chains. That isn’t just good for suppliers, it’s good for banks, businesses and the wider economy, too.