For small firms, a way to leverage their invoices

A growing number of the world’s largest corporates have begun demanding 90 to 120 days to pay their suppliers, in a bid to maximise their working capital and ease their accounts payable.

But many from the small and medium sized enterprises (SMEs) sector who supply them are facing major financial constraints even beyond the hurdles they already face. In the past, extended payment terms indicated cash flow problems in a purchasing firm.

But these days big companies are imposing longer payment schedules on their suppliers as a basic business strategy to inject cash into other projects like expanding into new markets or investing in new technology. It is not unusual to see payment terms of up to four months these days.

But as SME balance sheets face the squeeze from delayed payments, banks and other conventional lenders are increasingly reluctant to take chances originating small business loans. Heightened post-crisis credit checks, extensive filing requirements, and slower approval times have caused a massive SME funding gap in the MENA region, reaching as high as $260 billion, the International Finance Corporation (IFC) estimates.

This gap demonstrates the mismatch between the needs of small businesses and the supply of financial services firms, which prefer to cater to larger firms that are garner much higher fees.

Access to capital is vital for the growth of the UAE’s SME sector. These small firms account for up to 60 per cent of GDP and over 90 per cent of employment. They include some 300,000 or so businesses which form the backbone of the economy. But because of their size, they are particularly vulnerable to suffering from late payments from suppliers and distributors.

Banks and other conventional lenders may be large, but they continue to fail to address this gap. And so new business models like crowdfunding have come in, matching creditworthy businesses directly with investors seeking higher returns.

Beehive, which has developed an online peer-to-peer financing platform, has used the technology to finance more than $3 million in loans to more than 20 SMEs since the launch in November 2014. By connecting individual investors with small companies in need of finance, Beehive is able to raise money on cheaper, quicker and more flexible terms. All parties win, and Beehive benefits from their success.

Delayed payments not only harm SMEs, they keep corporates from engaging in more sustainable methods of growth, potentially even exposing them to greater risk in the long run. What started as a way to preserve funds during the financial crisis of 2008, has become a means of freeing up large amounts of capital to support dividend payouts, buy back equity, and fund growth during periods of poor sales and falling profit margins.

If corporates continue to treat their suppliers as source of cheap finance rather than partners, long payment terms will eventually undermine the companies they rely on to supply them. As suppliers experience shortages of cash due to delayed payments from purchasers, they can find themselves in the fragile state of being unable to keep fully stocked warehouses or to participate in bids on high-priced items.

Corporates subsequently either go without these items, or are forced to choose from a limited range of suppliers based on who has enough cash on hand to survive receiving a delayed payment. Small businesses lose out because they don’t have enough cash to front for the item, and corporates lose out by either paying more for the product, or by not finding a supplier at all.

Delaying supplier payments for months is simply bad business practice. It means that large companies are essentially receiving cheap credit from their suppliers rather than going to the banks themselves, turning suppliers into lenders and, significantly, reducing cashflows in the SME sector. SME’s aren’t the only ones suffering: their additional financing costs eventually translate into higher prices for consumers.

Now a new kind of financing offering is promising to provide finance to help them ease cash flow issues and reach their full potential. Invoice finance offerings, like Beehive’s recently launched SME invoice financing tool, are a rapidly growing tool designed to serve SMEs and help them manage their cashflows by closing the gap between the issue of an invoice and the receipt of actual payment.

By unlocking the value of their accounts-receivable, they are able to tackle the dual challenges of rising inflation and late payments. These products give SMEs more options to plug invoice gaps, giving them more control over their business and finances, and thus a greater opportunity for security and growth.

The SME sector continues to supply the greatest share of jobs and GDP, particularly in the UAE where SMEs represent a whopping 95 per cent of all establishments according to the Dubai Department of Economic Development.

Financial tools that ease the financial burden placed on small suppliers by larger companies will have powerful effects, not only on the SMEs they serve, but on the corporates themselves, and the economy as a whole.

The writer is the Founder and CEO of Beehive, the online marketplace for peer-to-peer lending.