A worrying lack of credit awareness amongst the UK ’s small and medium sized business community has been revealed by new research from Experian, the global information services company.

Experian’s survey of nearly 700 UK small businesses found that 71 per cent did not check their customers’ credit status, exposing them to a greater risk of being paid late or not being paid at all.

The survey also revealed that 39 per cent of small businesses did not know what a credit score was, while 61 per cent have never checked their own score.  Businesses that do not check their scores are unlikely to be aware of any issues until they lose out on a contract with a potential new customer, are refused materials from a new supplier or are turned down for finance.

Credit scores provide an assessment of a business’s financial health, with a low score implying that a business is more likely to fail. According to Experian, for small businesses many low scores can stem from a lack of detailed data about the business or a failure to file complete or accurate information, rather than underlying financial insecurity.

A low credit score can affect a business’s ability to access finance or attract new customers, while it could also force suppliers to impose more stringent trading agreements.  Small businesses tend to rely on a small pool of suppliers and customers, and a single customer loss or change in terms can have a large impact on the financial health of the business.

Simon Streat, managing director of Experian’s UK SME business, said: “Two thirds of small businesses may be blind to their credit scores, but their larger customers, suppliers and banks certainly won’t be.

“Failure to address credit problems may put small and medium sized businesses at a big disadvantage, as many organisations will be put off engaging with a company that has a low score. It is important for businesses to monitor their credit score on a regular basis to ensure it reflects their situation accurately and to be able to take action to resolve any issues that are highlighted.

“Simply taking the steps to check the credit score of firms before doing business with them is straightforward and affordable, and it could make all the difference.”

Factors such as incomplete accounts, a location change, the move from non-limited to limited status, or mergers and acquisitions, can all influence credit scores.  By engaging proactively with credit reference agencies, firms will be better equipped to take action to boost their score and improve the external perception of their business.

Not all customers are good for your business.

With so much focus on growth, all eyes are on small businesses to make it happen. The ability to find and acquire new customers is a key element in the growth process, but Experian’s research has identified this as one of the main areas of concern for small businesses.

Finding new customers can be a challenge, while finding profitable customers is another. However, businesses are operating in a riskier environment than they would have been used to in the early part of this century, and the biggest challenge today is finding customers that will continue to pay their bills.

Experian’s latest data on late paying businesses reveals the last two quarters of 2010 saw a deteriorating payment trend among businesses, while the first quarter of 2011 saw no signs of significant improvement as UK businesses continued to contend with challenging trading conditions.

While the largest businesses (500+ employees) remained the worst late payment culprits, smaller firms with three to ten employees – traditionally among the fastest payers – saw the biggest deterioration in payment performance as greater numbers struggled to pay their bills.

This highlights that the current threat of exposure to bad debt is a very real one. Businesses face reputational as well as financial risk when they target failing businesses. If you knew in advance that a potential customer wasn’t going to pay their invoice, would you still target that them? Would you still go after their business?

Small firms looking for new business clients should not simply target every potential prospect in their region without delving deeper into the impact those businesses could have on their own operations. Taking on the wrong kind of customers could have a negative effect on their own businesses and ultimately lead to its own demise.

While intelligent marketing information is still key to highlighting those prospects most likely to buy, credit risk information is just as important to show those that are most likely to pay. The financial losses and to failing businesses could well create a knock-on effect that causes their own business to fail.

Not every single business classed as risky will fail, as many will take some steps to change the path they going down.

So, the first step is to take them out of the equation. Through the use of marketing data that has been pre-screened against credit risk data, those unprofitable, high-risk businesses, including those that are likely to fail in the coming year, can be removed from an organisation’s databases and marketing prospect lists. This will enable small businesses to ensure their resources are more focused and effective. It will in turn reduce unnecessary expense marketing to unsuitable prospects and also help avoid the costs associated with expensive sales visits to small businesses that will end up proving costly in the long run.

However, while this can prove highly effective in avoiding the businesses most likely to fail within the next 12 months, it is only the first step. There is a more intelligent way of using pre-screened data.

Small businesses can use this data to delve deeper into the higher risk companies. By targeting them with payment terms and conditions that are more appropriate to them or by agreeing up front deposits before goods or services are despatched, businesses will be able to continue to take on new customers, but at lower risk.

It is worth bearing in mind that not every single business classed as risky will fail, as many will take some serious steps to change the path they are going down. By taking advice, reviewing current operations and adopting best practice, some of these struggling companies will manage to turn their fortunes around. However, until the business does turn itself around, it is still a risky prospect.

If the status of a high risk business later changes and it begins to grow, it could become a profitable customer in the future. Experian’s analysis shows that there is a lesson for all firms in terms of creating and enforcing robust credit management and collection policies so that companies do not leave payment to chance. Goodwill goes a long way in business relationships, but ultimately firms need to pick up the money that they are owed promptly or they risk encountering serious cash flow issues.

Content Source: Simon Streat. Managing Director of SME, Experian UK&I

 

New figures show that HMRC is increasingly rejecting applications to defer tax payments through the “Time to Pay”.

The number of new “Time to Pay” arrangements agreed by HMRC fell by 43% over the last twelve months from 57,800 in Q1 2010 to just 32,900 in Q1 2011. The combined value of the tax payments deferred fell by 40% from £890m in Q1 2010 to just £530m in Q1 2011.

Over the same period, the proportion of applications rejected rose by 50%, with 1,130 companies seeing their applications under the scheme rejected each month in the first quarter of this year.

Payment terms are also becoming more stringent.  In the first quarter of 2010 HMRC offered 14% of successful applicants a payment plan of ten months to a year, but only 10% of successful applicants during the first quarter of 2011 were offered similar terms.   61% of “Time to Pay” agreements are now for a payment schedule of just three months or less.

“Time to Pay” was designed by HM Revenue & Customs to allow viable businesses to defer tax payments during the downturn. It has been seen by many business organisations as one of the most effective of the programmes designed by the Government to stimulate the economy during the downturn.

The latest economic data shows that the economy grew by just 0.5% in the three months to the end of March, just making up for ground lost in the last quarter of 2010.

Philip White, Chief Executive of Syscap comments: “We may not technically be in recession, but if you look at the six month trend, growth is flat-lining, so we have to cross our fingers that a double-dip recession will be avoided.”

“These new figures show that HMRC is rapidly winding down the “Time to Pay” scheme at a time when companies are clearly still struggling.”

“HMRC is being far tougher about deferring tax payments – applicants that might previously have been successful are now being rejected.”

Philip White explains that as well as battling the sluggish economy, companies have also been put under pressure by the increase in VAT, which rose to 20% in January 2011 and has strained business cash-flow.

Philip White says: “Not only are companies faced with the rise in VAT, but unincorporated businesses such as partnerships and the self-employed also need to make sure that they have the cash available to make the six monthly tax payment due at the end of July.”

Syscap says that their customers have reported significant changes introduced by HMRC to the “Time to Pay” process, including asking businesses to apply for a bank loan or even make a tax payment with a credit card, incurring an extra card handling charge, before they become eligible for assistance through the scheme.

Philip White says: “HMRC may need to reconsider their decision to wind down the “Time to Pay” scheme. The economy remains sluggish and we have yet to feel the adverse impact of the public sector cuts, which only came into effect at the beginning of April.”

The Government and its agencies are still paying small businesses late despite making commitments over a year ago to pay within 10 days, the FSB-ICM ‘Voice of Small Business’ Annual Survey report shows.

The report found that local Government is likely to pay one in four invoices late, and central Government and Government agencies make one in three payments late. This is despite putting a Prompt Payment Code in place and central Government promising to pay within 10 days at the start of the recession in 2008.

Small businesses have faced a challenging year, with over half (52 per cent) of those surveyed reporting that profits had fallen in 2009. As the recession took hold all businesses felt the pinch, however it is the small business community which bears the brunt of this practice and are leaned on by big businesses which continue to pay late. The survey shows UK central Government (31 per cent), Government agencies (30 per cent), EU institutions (30 per cent), NHS (29 per cent) and local authorities (25 per cent) all put the pressure on too, despite promises to the contrary. Thirty four per cent of payments from the private sector are late according to the survey.

Frustratingly, many businesses have had to resort to using their own long and short-term finance. The survey shows that 41 per cent dipped into personal savings and 43 per cent used their overdrafts last year. Twenty one per cent used a personal credit card. This may be an indication of self-reliance as they encountered a banking sector which refused to lend.

While large firms have sufficient reserves to cope with late payments, a small business relies on payment within the agreed timescale to ensure it has a steady cash-flow.

The FSB is now urging Government to take the lead in tacking this problem by implementing a ‘Social Clause’ in national and local Government contracts. This relies on the Government stepping up its game, paying swiftly and then giving a guarantee that when the Government pays the lead contractor quickly, this is passed down the supply chain to all sub-contractors – with penalties attached for persistent non-compliance.

John Wright, national chairman of the Federation of Small Businesses, said: “It is shocking that after the Government put the Prompt Payment Code in place so many businesses are still being paid late. The public sector needs to take the lead in more than word alone and set an example that paying late isn’t acceptable, as this problem persists in the private sector.

“Small businesses rely on receiving payments within the timescale agreed to maintain cash-flow to ensure the business can run on a day-to-day basis. This is why the FSB is calling for the introduction of a ‘Social Clause’ in all Government contracts.

“However, this clause must have teeth, and any business found to persistently breach the terms should be fined and be warned they may lose contracts in the future. This will give small businesses confidence and go far to change the poor record of behaviour on this issue.

“Late payment is not a new issue, but it has been a particular problem in the past year and it is more important than ever that this worrying practice is brought to an end.”

With more than two million SMEs saying the issue they’d most like this month’s Budget to address is the problem of late payments, HSBC Commercial Banking has urged businesses to take action and ensure they have the right financial solutions in place to help manage cashflow over the long-term.

According to recent research, payments owed to SMEs have risen by almost 40 per cent in the last year to £26 billion and many businesses are caught in an unsustainable cycle of companies billing quicker and taking longer to pay.

Figures show that SMEs are being forced to wait up to six weeks after the agreed payment date to receive payment.

Yet just one in 10 businesses are currently using invoice finance to free up their cashflow according to research from HSBC Commercial Banking. With cash released – in most cases – within one day of the invoice being issued, invoice finance makes funds available which can enable SMEs to respond quickly and decisively in challenging market conditions.

With the recession placing increased pressure on UK businesses – 64 per cent of SMEs say that managing cashflow in the current economic climate is their biggest challenge for growth. Effectively managing cashflow is just one of the tips included in an online video launched by HSBC Commercial Banking which features a collection of stories from real businesses, practical advice from financial specialists and economists offering top tips on beating the credit crunch.

Noel Quinn, HSBC’s head of commercial banking UK, said: “We are urging businesses to ensure they have the right financial tools in place and are seeking appropriate advice to help them weather the storm. Ultimately a healthy cashflow is critical in a downturn and businesses do have the option, through invoice finance, of working with a financial partner to implement their payment collections on their behalf – allowing them to focus on the running of their business.

“We understand the pressure that businesses are under in the current climate and in a bid to alleviate some of the pressure we have already announced the availability of a £1 billion working capital fund which has been specifically designed to assist SMEs and make the day-to-day running of business more manageable.”