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Half of UK SMEs suffering from late payments as economic conditions worsen: study

New research from the Federation of Small Businesses has revealed that half of 1300 SMEs and sole traders involved in their quarterly research reported receiving late payment from their clients between April and June of 2022 – with a further one in five stating the issue was worsening amidst macroeconomic conditions. 

As a result, the business advisory specialists for startups with high growth trajectory, Trachet, says it is a critical moment for startups and small businesses to tighten their payment terms to improve cash flow.

According to the Institute of Directors’ latest poll of business chiefs, business leaders have become weary about their organisation’s growth, with over half relating soaring energy costs and skills shortages to projections of a rocky road ahead. Serving as testament to this, UK business investment intentions have been in decline since the beginning of the year, undermining efforts to lift productivity. 

Trachet says many British startups are seeing VC investment pull back steadily, this alongside the rising cash flow threat caused by late payments has created a moment of uncertainty for these organisations.

Trachet highlights the importance of cash management, at a moment where acquiring funding is becoming increasingly difficult. Ensuring supplier payment terms are favourable is crucial to accurate cash flow projections, enabling an organisation to manage growth, taxes and keep the business running. Having an accurate depiction of cash flow is also essential to future fundraising rounds, as numbers increasingly prevail over narrative when looking for capital. Payment arrangements can be renegotiated when reviewing prices and renovating contracts, using an advisor at this point is critical as few businesses are aware of the different policies that protect small businesses from late payments.

As UK startups at many stages are experiencing an absence of funding, navigating a potential M&A has become their only alternative, particularly for those with a high cash burn. It usually takes at least 3-6 months to execute an M&A, from devising a step-by-step plan, identifying the right companies, and closing the deal. When there’s a forecasted cash flow issue this is the window for startups to develop the best possible terms for an exit strategy.

 Business advisor, Claire Trachet, CEO & Founder of Trachet comments: “We’re seeing a combination of both late and early-stage startups becoming compromised as the well of easy and cheap money has dried up. My best piece of advice in these challenging times is to assess end goals for organisations looking to extend the runway – perhaps in light of what’s happening in the capital markets, a better course of action may be to consider an exit, or conversely there may be another company worth acquiring to fortify and expand existing operations.

“The point is to keep moving forward, that means being diligent with the business’s cash management and optimising cash flow, keeping company culture alive amidst layoffs and reviewing the contracts you have with your clients. Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit – ideally startups should be doing both.”

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