Using finance to balance the books

A new report has revealed that balancing the books is the number one use of small business credit as figures show late payments have now topped the £20bn mark.

“Managing cashflow” is the most common use of external finance, according to the latest Federation of Small Businesses’ Small Business Index.

Four out of ten UK small businesses that made successful finance applications in the last quarter used the cash for that purpose rather than investing in their firms.

Less than one in four used finance to update equipment with just 16 per cent using the funds to expand their business.

Earlier research has revealed that the UK late payment crisis is leading to the closure of 50,000 small businesses a year at a cost of £2.5bn to the economy.

And the latest figures from Pay.UK show that the balance of outstanding late payments almost doubled to £23.4bn in 2019.

And that is despite continual and vocal campaigning in recent years to end late payments and “supply chain bullying” and to create a new more positive payments culture.

As FSB National Chairman Mike Cherry says it is troubling that so many external finance applications are driven by concerns over cashflow.

He says: “This really shouldn’t be the case – you wouldn’t dream of doing your weekly shop and telling the cashier that you’ll pay for it in 100 days, but corporations take this approach to small businesses in droves.

“The uncertainties facing big businesses over the past few years will have no doubt increased the temptation to use small firms as free credit lines. We need to put that attitude to bed, for good.”

He adds: “We fought hard for a package of late payment reforms under the last administration. Frustratingly, it was put on ice due to the general election. We’ll be working closely with the new small business commissioner to resurrect it.”

There is also more work to be done to make smaller businesses aware of all the finance options available to them.

It’s also worth looking once again at ways businesses can avoid bad debt problems. Here are some top tips. We’ve published them before but they are worth returning to:

  1. Know your client. When you take on a new customer check them out, get to know their financial situation, and their track record of payment. If they’ve left a previous supplier find out why. Take your time and be thorough.
    The Small Business and Enterprise Act 2015 and the Payment Practices and Performance Regulations were launched in April 2017. Larger companies are now required to publish twice-yearly the average time they take to pay invoices and the percentage not paid in the agreed terms. Suppliers can use the Payment Practices Reporting website (, to learn more about the reality of engaging in business with a larger firm.
  2. Get a signature. It is important to have proper Terms of Business in place. They should deal with payment terms in clear and precise terms – and set out your rights of remedy if payment is defaulted. Make sure your customers know your terms and get a signed acknowledgment from them that they have read and understood them fully. It pays to get help and advice when you are drafting them to make sure that your terms are enforceable.
  3. Chase debt early. Act with speed if you suspect a customer is in trouble. It can make all the difference in recovering what’s owed to you. Even if just one invoice is overdue consider if it’s in your company’s best interests to continue to work for them. You do not want to rack up the debt.
  4. Put procedures in place to recover bad debt. It’s vital that you have processes in place to chase what is owed to you. Some SMEs outsource this and it can be very effective for smaller businesses, putting distance between them and their client. A systems-based process is vital to this, and experts will chase unpaid debts all the way to court action and enforcement if needed. It’s important to have this process in place because poor cash flow can threaten the future of your company.
  5. Consider court of insolvency procedures. These are the formal steps you can take if all else has failed to get what you are owed. Again, look which is the best route to take – and one that gives you a realistic prospect of getting your money. If you get a successful judgement you still need to enforce it.

To discuss any issues raised by this article please contact me on 01772 430000