Flexibility, not red tape, is the future small businesses need

iwocaPay is a Business Reporter client

Following the recent hike in employer National Insurance contributions, many small businesses have been feeling the pinch. In response, the government is rightly looking at measures to support SMEs and prove its pro-business credentials.

Despite these good intentions, the new plans to tackle late payments and lengthy payment terms, as well as proposed regulation on buy-now-pay-later (BNPL) products, risk misdiagnosing the issues SMEs face and cutting off vital funding that these firms rely on to grow and thrive.

Since the pandemic, the business landscape has turned on its head. The government’s simplistic “David versus Goliath” narrative about large multinationals using payment terms to get one over on the little guy and avoid paying their dues on time is outdated and misses a vital part of the equation. In the past four years, SME suppliers and customers alike have been flocking towards flexible payment terms en masse.

At iwoca, we carried out joint research with Cebr which made this point crystal clear. Four years ago, flexible payment terms were the exception. Today, they’re the rule: 84 per cent of businesses report the need to extend their payment terms to keep their customers happy – nearly double the rate in 2020.

Why the jump? Because when cash flow is uncertain, payment flexibility is king. For two-thirds of suppliers, offering trade credit has led to more sales, while three-quarters said they extend trade credit to long-standing customers, larger orders or larger clients. It’s a win-win: suppliers lock in business, and buyers can purchase what they need without an immediate cash crunch.

This isn’t just an added perk that businesses can offer. It’s a response to a real and pressing customer need. According to our research, 39 per cent of customers say that a lack of flexible payment options limits their ability to buy the goods they need. For these businesses, trade credit isn’t just convenient, it’s a lifeline.

Offering flexible payments does come with its own headaches, though. Keeping track of varied payment terms can be an administrative nightmare for suppliers, creating a black hole that sucks in productivity. That’s why embracing digitisation is critical. Digital business-to-business BNPL tools manage the risk and admin, freeing up businesses to get paid immediately and focus on what they do best, while offering buyers the flexibility to pay back over a longer period of time, helping their cash flow.

For sole traders, alternative funding sources such as BNPL products have been nothing short of a lifeline. Traditional lending often falls short for small businesses, with loans under £25,000 trapped in a web of consumer-focused affordability requirements. Digital payments products provide a win-win solution for business, helping suppliers get paid on time while allowing buyers to spread their payments. This allows the UK’s sole traders to access vital funding.

The government’s proposed regulations look to address understandable concerns with consumer BNPL products. It’s easy to see how these products could convince shoppers to take the plunge on an impulse buy. But a sole trader can’t impulse-buy five new industrial freezers, or new accounting software. So it’s crucial that these regulations don’t inadvertently cut off this vital digital lifeline.

For the government to deliver on its pro-growth agenda, it’s going to need small businesses that are flourishing, not drowning in red tape. The real challenge for SME lies in digitising swiftly and strategically, and this is where the government has a real opportunity to take a supportive approach.

Our research highlights the transformative potential of digitisation. Digital suppliers achieve 3.4 times the productivity of traditional businesses, and those adopting digital trade credit solutions are 2.6 times more productive than those that do not. This shows that when implemented effectively, digitisation not only enhances productivity but also streamlines operations, allowing both buyers and suppliers to thrive in the evolving payment landscape while managing risks responsibly.

Small businesses are the beating heart of the UK economy, and the government is right to think that it needs to win them over and ensure that they can thrive to deliver its mission of economic growth. The government must make regulation on BNPL proportionate by exempting all sole traders that are VAT registered and are looking to use BNPL for business borrowing purposes. Now more than ever, it must review how sole traders are treated within the business exemption clause in the Consumer Credit Act (CCA).

A bold, 21st century vision for digitising SMEs and boosting access to critical solutions such as BNPL could unlock immense potential, and cement this government as one that stands firmly for British business.

By Lara Gilman, Co-Lead, iwocaPay