Many SMEs struggle greatly when it comes to cash flow issues, with a large number of them -- 82% to be specific -- finally tumbling due to persistent cash flow problems or a failure to understand cash flow issues and how the affect their businesses.
In fact, if you were running a small enterprise or business today, it would stand a 85% chance to fail due to cash flow problems even as majority of small businesses fail within the first five years. And cash flow is not same as profits: a business could record high daily profits but still have low cash flow and persistent cash flow problems. SMEs rely on a small number of customers and delayed payments and extensive settlement periods have serious consequences.
Delayed payments are those payments not done by or within the settlement period but for the purposes of this article, we will be exploring extended settlement periods as a factor of concern for SMEs. Here is the difference: most of business contracts today allow for sometime before the seller is paid and that's what is called normal settlement period. If the buyer settles within that period, it is not delayed payment in normal circumstances. Otherwise, it is a delayed payment.
Through instant payment, use of blockchain and crypto by business parties within a business setting can obviously help in both cases -- to reduce the settlement period or the need for waiting for payments and to eliminate the delays experienced beyond the settlement periods.
Cash flow affects decision making in an organization settings, for instance because it measures the ability of the company to pay its bills, with some businesses having bills to pay on a daily or weekly basis.
Restraining growth of SMEs
Delayed payments cost small businesses a cool $3 trillion per year as they try to chase payments.
If you have not yet looked into how delayed or late payments (those unpaid on or by the settlement date) affect SMEs, over two fifths of SMEs experience problems with delayed payments according to a research by Close Brothers. Now, the research found out that over half of businesses (56.9%) struggle with cash flow management as a result of delayed payments and settlement of their invoices. These businesses struggle with poor working capital, are unable to achieve their goals or worse, cannot continue with usual trading. More specifically, 16.2% of those interviewed said these delays affect their ability to trade successfully while a few said they spent time chasing payments.
A report commissioned last year by Amicus Commercial Finance found out that 61% of invoices issued by by UK small and medium sized enterprises (SMEs) remained unpaid within the debtor day period. 70% of the firms interviewed for this report said they rely on timely payments on debtor day period in order to avoid shortage of working capital. According to this report, 16% of SMEs remain unpaid 90 days after the payment period is over and 7% or half of these are still unpaid six months after. The report details the most affected firms as the medium-sized businesses hiring between 50 and 249 employees with a quarter of their invoices unpaid after their debtor day period or not at all.
The report also details the negative impacts delayed payments can have on owners, with 28% saying it caused considerable stress and anxiety and 19% reporting that their frustration due to delayed payments had turned into anger. 10 % said they were scared their business would end following delayed payments.
The problem of delayed payments and settlement is all over in the globe for as far as SMEs extend.
A company can be forced by circumstances to make bad business-related decisions as a result of cash flow problems. Some bad decisions include pricing their products and services lower than what they would otherwise have priced them as per their normal pricing models. Other bad decisions related to cash flow include holding/quickening hiring decisions or firing of staff/workers. Most importantly, company operations such as marketing, training/retraining, and equipment servicing may, for instance, come to an halt due to cash flow problems. Remember these and others might be very important tasks that are directly related to increased ROI.
Depending on the kind of business, a business might have critical daily expenses to incur. Also, take for instance the sales expenses that are directly associated with business profits and income. These may all fail to perform successfully due to cash flow issues. Under cash flow problems, a business development and growth is at risk.
The way to survive as a business is to ensure that the owner has long term business decisions in place even if there are struggles with cash flow. The owner should make sure to make the right decisions. In many cases, 80% of businesses struggling with cash flow fail to make good spending decisions and make them out of fear, meaning they cannot invest because they are afraid to spend money due to an impending cash flow problem.
Under normal circumstances, many businesses are likely to incur more expenses than revenue during their early stages of growth as they try to validate R&D, go to market, figure out sales and marketing, admin costs, and contractor relationships, etc. That doesn't mean they should not manage their cash flows. Proper cash distribution into each of the categories of your business spending, use of benchmarks to set expenditure for instance by considering how other or similar businesses are spending, micromanaging expenditure to avoid overspending, and forecasting, can all help in the dealing with a cash flow problem.
Why there is settlement periods ...and delays
Most business contracts come with a defined settlement period within which a business transaction needs to be processed and settled. In few cases and for simpler transactions, settlement is possible within a few days less than a week to 30 days, but in some cases such as in government-based contracts, payment extends to six months and even years in some cases. Also, in many cases, the buyer and seller are able to come to an agreement about the settlement periods.
Some reasons for defined settlement periods traditionally is because of the processes that a transaction must go through before exchange of ownership of what is being traded, which can be expedited via blockchain/crypto as we shall see later. These include processes related to exchange of documents between parties and their middlemen, transportation and logistics for which product arrival has to be confirmed and manual confirmations, paper work, legal processes in a transaction duration for instance documents having to go through offices, the logistics, bank checking mechanisms, etc. It will need to verify documents, claims etc.
However, most businesses fail to pay their bills within 30 days and some suppliers have to wait for more than 100 days. Therefore, reasons extend to lack of money by the payer. So beyond the normal defined settlement periods, complications may occur in the settlement mechanisms, which may result to delays in payments. Also, for instance, one client may fail to return vital documents or say errors occurring in between the processes either by administrators or clients. In some cases, document transportation or submission or verification are delayed. This may be so when vital documents such as Transfer of Land are needed to complete a transaction.
Delays in settlements -- to mean settlements beyond agreed dates -- may also occur if a party has some complaints or disputes about the purchases. In some cases, delays may also happen if a purchase relies on completion of a purchase of another property or completion of another transaction.
Invoice financing as a solution to cash flow problems
Invoice financing is a critical solution for most companies and SMEs who need to settle bills immediately in the face of delayed payments or even during the normal settlement periods. The company borrows money against an invoice and the money is to be settled at the invoice payment date. Invoice factoring allows SMEs to convert invoices due within 90 days into immediate cash. Usually, what is advanced is at a lesser amount than what is to be paid on the invoice, while the rest if paid once the invoice is paid. This happens in the case of factoring.
Invoice financing is more streamlined, easier to use, and doesn’t require the assignment of invoices like factoring does. The fees could be paid when the invoice is paid i.e. when an SME receives the last or remaining amount in the case of invoice factoring, or in the beginning when the cash is first advanced to the business.
However, there barely will be any time when invoice financing will be advantageous for your business than your earnings or incomes from that invoice, because invoice financing comes at a cost.
In addition to the service fees which ranges from 0.1 % to 20%, there is due diligence fees ranging from a few hundred to a few thousand dollars, and some discount rate percentage charged on the advanced funds. The discount rate is calculated daily and charged monthly.
Invoice financing answers to cash flow issues and not to all/many other issues/challenges for SMEs
How blockchain and crypto are helping SMEs reduce settlement periods and delays in payments
Blockchain not only helps to automate manual trade and payment processes that turn out to be slow, cumbersome and present many risks when reconciling and matching, it can quicken cross-border transactions. Blockchain is not just an automation technology: it goes much beyond that and even conventional electronic and digital operations can benefit a lot from usage of blockchain. With blockchain, each party in the trade life-cycle (e.g. broker dealers, intermediaries, custodians, clearing and settlement teams) will have the same copy of transaction records, and it becomes easy to verify, reconcile, and match transactions while still avoiding fraud and errors that could cause settlement delays.
Blockchain systems also come with easy transaction tracking to offer each party clear information about not just when the payment is to be completed but the stages it currently is at. This allows for better management of business and removing guess work in making decisions and taking actions due to issues related to availability of or lack of funds.
Blockchain, through smart contracts, allows buyers and sellers or any party in a transaction to automate trade actions which can be set to automatically complete on the chain when the set agreements and pre-agreed conditions are met. This is applicable in virtually any industry, whether you are talking about insurance, home selling and purchases or trading of other goods and services, supply chains, contractual trades, trade financing, banking, or normal day to day trading of goods and services. Smart contracts not only reduce delays in completion of transactions but can also reduce delays and costs that would result due to contract disputes.
Blockchain automates supply chains in order to facilitate product tracking, eliminate the need to wait for extended periods spent in providing Letters of Credit and other related trade documents, reduce cost of business by cutting out middlemen and their fees, automate payments alongside crypto and eliminates need for manual transaction actions, and ensures that the parties can ascertain to the authenticity and originality of products being supplied. It means manufacturers and suppliers can identify counterfeits and reduce business costs related to this.
In regard to delays as a result of many legacy banking processes related to normal clearing of international payments, blockchain and cryptocurrencies are already being applied to facilitate cross-border payments within seconds or instantly while still eliminating/reducing risks related to fraud and theft. It can also be used for anonymous payments where need be.
Finally, blockchain platforms can also facilitate a marketplace for trading invoices on crypto, which extended benefits such as provision of data to business owners, choice options for business parties, choice options for currencies in which to be paid, better invoice financing rates, global access to invoice financiers, etc. Besides, blockchain can be utilized by governments and authorities to quicken compliance, customer identification, taxation, etc and eliminate delays caused at clearance points.
Blockchain can make available important data for SMEs owners to develop and grow their businesses. It can help them make strategic decisions regarding cash and non-cash matters.
Thus, blockchain not only answers to payment problems but addresses many other problems faced by SMEs and will also extend benefits to other players and parties as well.